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Should Hong Kong switch to Taylor rule?—Evidence from DSGE model

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  • Zhiqi Zhao
  • David Meenagh
  • Patrick Minford

Abstract

This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour as represented by a VAR. We examined the economy’s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility.

Suggested Citation

  • Zhiqi Zhao & David Meenagh & Patrick Minford, 2022. "Should Hong Kong switch to Taylor rule?—Evidence from DSGE model," Applied Economics, Taylor & Francis Journals, vol. 54(50), pages 5851-5872, October.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:50:p:5851-5872
    DOI: 10.1080/00036846.2022.2053655
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G5 - Financial Economics - - Household Finance

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