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

  • Dong He

    (Research Department, Hong Kong Monetary Authority)

  • Frank Leung

    (Research Department, Hong Kong Monetary Authority)

  • Philip Ng

    (Research Department, Hong Kong Monetary Authority)

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.

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File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_17_full.pdf
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Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0717.

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Length: 27 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:hkg:wpaper:0717
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  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 sources of macroeconomic fluctuations in Hong Kong," IHEID Working Papers 05-2003, Economics Section, The Graduate Institute of International Studies.
  3. Hans Genberg & Li-gang Liu & Xiangrong Jin, 2006. "Hong Kong's Economic Integration and Business Cycle Synchronisation with Mainland China and the US," Working Papers 0611, Hong Kong Monetary Authority.
  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. Bernard Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
  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.
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