The economies of Hong Kong and Singapore are alike in many respects. Both are fast growing, export oriented and highly open in both goods and financial markets. But Hong Kong has maintained a pegged exchange rate since 1983, while Singapore has been on a floating regime since the early 1970's. This paper provides an interpretation of the different performance of the Hong Kong and Singapore economy that could be attributable to the differences in their exchange rate regime. A prototype two sector dynamic general equilibrium 'dependent economy' model with nominal price rigidities is developed to provide a background interpretation for the discussion. We suggest that the model can help to interpret both the longer run trends in inflation, land prices and real exchange rates in Hong Kong and Singapore as well as the differences in macroeconomic volatility. The model suggests that small economy should exhibit higher volatility in real GDP under a fixed exchange rate than under floating rates, and that the real exchange rate should be less counter-cyclical. These implications are borne out in the data for Hong Kong and Singapore. In addition, the strong differences in the response of the two economies to the Asian crisis is also consistent with our model.
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Paper provided by UBC Department of Economics in its series UBC Departmental Archives with number
99-12.
Find related papers by JEL classification: F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
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