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How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?

Author

Listed:
  • Dong He

    (Research Department, Hong Kong Monetary Authority)

  • Frank Leung

    (Research Department, Hong Kong Monetary Authority)

  • Philip Ng

    (Research Department, Hong Kong Monetary Authority)

Abstract

This paper studies the significance of Mainland-related shocks in determining Hong Kong money market interest rates after controlling for the influences of US variables. Analysis using a vector auto-regression model suggests that an unexpected rise in the Mainland policy interest rate, or a higher-than-expected growth in Mainland output or money supply, in general produces a positive and hump-shaped effect on the three-month HIBOR. Forecast error variance decomposition shows that US shocks still dominate, but Mainland shocks have become more important in accounting for the unexpected fluctuations in HIBOR in recent years. A historical decomposition shows that from autumn 2003 to spring 2005 the large negative spread between HIBOR and LIBOR was mainly due to Mainland factors. Thus, while the HIBOR-LIBOR spread is expected to be bounded inside a band that reflects the width of the Convertibility Zone of the Linked Exchange Rate system, Mainland-related shocks could exert a significant influence on the actual size of the spread.

Suggested Citation

  • Dong He & Frank Leung & Philip Ng, 2007. "How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?," Working Papers 0717, Hong Kong Monetary Authority.
  • Handle: RePEc:hkg:wpaper:0717
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_17_full.pdf
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    References listed on IDEAS

    as
    1. Wensheng Peng & Frank Leung, 2005. "A Monetary Conditions Index for Mainland China," Working Papers 0501, Hong Kong Monetary Authority.
    2. Hans Genberg, 2003. "Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong," Working Papers 172003, Hong Kong Institute for Monetary Research.
    3. Bernard J Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
    4. Tony Latter, 2007. "Rules versus discretion in managing the Hong Kong dollar, 1983-2006," Working Papers 022007, Hong Kong Institute for Monetary Research.
    5. Hans Genberg, 2003. "Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong," Working Papers 172003, Hong Kong Institute for Monetary Research.
    6. Cho-Hoi Hui & Tom Fong, 2007. "Is the Hong Kong Dollar Exchange Rate "Bounded" in the Convertibility Zone?," Working Papers 0713, Hong Kong Monetary Authority.
    7. Frank Leung & Kevin Chow & Simon Chan, 2010. "Measures of trend inflation in Hong Kong," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 177-200 Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Funke, Michael & Paetz, Michael & Pytlarczyk, Ernest, 2011. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Economic Modelling, Elsevier, vol. 28(1-2), pages 316-334, January.
    2. Hong Kong Monetary Authority, 2008. "Capital flows into and out of Hong Kong SAR: implications for monetary and financial stability," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 207-219 Bank for International Settlements.
    3. Dong He & Zhiwei Zhang & Honglin Wang, 2009. "Hong Kong's Financial Market Interactions with the US and Mainland China in Crisis and Tranquil Times," Working Papers 0910, Hong Kong Monetary Authority.

    More about this item

    Keywords

    Hong Kong; HIBOR; Linked Exchange Rate system;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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