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Hong Kong's Currency Board and Changing Monetary Regimes

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  • Yum K. Kwan
  • Francis T. Lui

Abstract

The paper discusses the historical background and institutional details of Hong Kong's currency board. We argue that its experience provides a good opportunity to test the macroeconomic implications of the currency board regime. Using the method of Blanchard and Quah (1989), we show that the parameters of the structural equations and the characteristics of supply and demand shocks have significantly changed since adopting the regime. Variance decomposition and impulse response analyses indicate Hong Kong's currency board is less susceptible to supply shocks, but demand shocks can cause greater short-term volatility under the system. The decent performance of Hong Kong's currency board is due mainly to the stable fiscal policy of its government. Counter-factual exercises also show that three-fourths of the reduction in observed output volatility and two-thirds of that in observed inflation volatility are explained by the adoption of the currency board, while the remainder is explained by changes in the external environment. The improvement in stability does not rule out the possibility of monetary collapse, however.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5723.

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Date of creation: Aug 1996
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Publication status: published as Changes in Exchange Rates in Rapidly Developing Countries. Ito,Takatoshiand Anne O. Krueger, eds., Chicago: The University of Chicago Press, 1999,pp. 403-429.
Handle: RePEc:nbr:nberwo:5723

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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 643, C.E.P.R. Discussion Papers.
  3. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number pa40, July.
  4. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  5. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C93-021, University of California at Berkeley.
  6. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
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Cited by:
  1. Urmas Sepp & Raoul Lättemäe & Martti Randveer, 2002. "The History and Sustainability of the CBA in Estonia," Macroeconomics, EconWPA 0212002, EconWPA.
  2. Tse, Y. K. & Yip, Paul S. L., 2003. "The impacts of Hong Kong's Currency Board reforms on the interbank market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(12), pages 2273-2296, December.
  3. Sõrg, Mart, 2004. "Estonian Monetary System: Reconstruction, Performance, and Future Prospects," Wirtschaftswissenschaftliche Diskussionspapiere 11/2004, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  4. Richard W. Kopcke, 1999. "Currency boards: once and future monetary regimes?," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue May, pages 21-37.
  5. Christopher A. Sims, 2001. "Fiscal Aspects of Central Bank Independence," CESifo Working Paper Series 547, CESifo Group Munich.
  6. Y. K. Tse & S. L. Yip, 2005. "Exchange-Rate Systems and Interest-Rate Behaviour: The Experience of Hong Kong and Singapore," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 0503, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  7. Bronka Rzepkowski, 2000. "The Expectations of Hong Kong Dollar Devaluation and Their Determinants," Working Papers 2000-04, CEPII research center.
  8. Korhonen, Iikka, 1999. "Currency Boards in the Baltic Countries: What Have We Learned?," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 6/1999, Bank of Finland, Institute for Economies in Transition.
  9. Raoul Lättemäe, 2001. "Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects," Bank of Estonia Working Papers, Bank of Estonia 2001-4, Bank of Estonia, revised 13 Oct 2001.
  10. Yuen Chi-Wa, 2002. "Openness And The Output-Inflation Tradeoff: Floating Vs. Fixed Exchange Rates," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(4), pages 1-26.
  11. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, Elsevier, vol. 69(2), pages 367-391, December.
  12. Sarkis Joseph Khoury & Clas Wihlborg, 2006. "Outsourcing Central Banking: Lessons from Estonia," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 125-144.
  13. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
  14. Sophie Chauvin, 2001. "Exit Options for Argentina with a Special Focus on Their Impact on External Trade," Working Papers 2001-07, CEPII research center.
  15. Malgorzata Jakubiak, 1999. "Design and Operation of Existing Currency Board Arrangements," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 0203, CASE-Center for Social and Economic Research.
  16. Mart Sõrg, 2005. "Estonia’s Accession to the EMU," Working Papers, Tallinn School of Economics and Business Administration, Tallinn University of Technology 133, Tallinn School of Economics and Business Administration, Tallinn University of Technology.

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