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A Currency Board Model of Hong Kong

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Author Info

  • Yue Ma

    (Lingnan University)

  • Guy Meredith

    (International Monetary Fund)

  • Matthew S. Yiu

    (Hong Kong INstitute for Monetary Research)

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Abstract

The need for a deeper understanding of the operation of Hong Kong's currency board arrangements was highlighted during the Asian financial crisis in 1998. A model-based approach built on hypothetical stochastic simulations would be useful for this purpose. This paper develops a new procedure of implementing stochastic simulations in a currency board model for Hong Kong. Our new procedure is useful in the context of a nonlinear model with forward-looking expectations under conditions of noncertainty-equivalence, such as the model of Hong Kong's currency board. A simple target-zone model of the exchange rate is used as an example to illustrate the difference between our new simulation procedure and existing procedures in the literature. Finally, the new procedure is applied to the currency board model to investigate the stochastic properties of endogenous variables under a wide range of shocks.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 012002.

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Length: 29 pages
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:hkm:wpaper:012002

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Related research

Keywords: currency board; stochastic simulation; certainty equivalence; Hong Kong;

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References

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  1. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  2. John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
  3. Fair, Ray C & Taylor, John B, 1990. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 381-92, Oct.-Dec..
  4. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  6. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 101, Federal Reserve Bank of Minneapolis.
  7. Rose, Colin, 1995. "A statistical identity linking folded and censored distributions," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(8), pages 1391-1403, November.
  8. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 669-82, August.
  9. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  10. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 1169-85, July.
  11. Barro, Robert J & Mankiw, N Gregory & Sala-i-Martin, Xavier, 1995. "Capital Mobility in Neoclassical Models of Growth," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 103-15, March.
  12. Ma, Yue & Kanas, Angelos, 2000. "Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(1), pages 135-152, February.
  13. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(2), pages 139-168.
  14. Ma, Yue, 1992. "Policy Measurement for the Dynamic Linear Model with Expectations Variables: A Multiplier Approach," Computer Science in Economics & Management, Society for Computational Economics, Society for Computational Economics, vol. 5(4), pages 303-12, November.
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Cited by:
  1. Huayu Sun & Yue Ma, 2005. "Balance of Payments Surplus and Renminbi Revaluation Pressure," Working Papers, Hong Kong Institute for Monetary Research 032005, Hong Kong Institute for Monetary Research.
  2. Sun, Huayu & Ma, Yue, 2005. "Policy strategies to deal with revaluation pressures on the renminbi," China Economic Review, Elsevier, Elsevier, vol. 16(2), pages 103-117.

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