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A Currency Board Model of Hong Kong


  • Yue Ma

    (Lingnan University)

  • Guy Meredith

    (International Monetary Fund)

  • Matthew S. Yiu

    (Hong Kong INstitute for Monetary Research)


The need for a deeper understanding of the operation of Hong Kong's currency board arrangements was highlighted during the Asian financial crisis in 1998. A model-based approach built on hypothetical stochastic simulations would be useful for this purpose. This paper develops a new procedure of implementing stochastic simulations in a currency board model for Hong Kong. Our new procedure is useful in the context of a nonlinear model with forward-looking expectations under conditions of noncertainty-equivalence, such as the model of Hong Kong's currency board. A simple target-zone model of the exchange rate is used as an example to illustrate the difference between our new simulation procedure and existing procedures in the literature. Finally, the new procedure is applied to the currency board model to investigate the stochastic properties of endogenous variables under a wide range of shocks.

Suggested Citation

  • Yue Ma & Guy Meredith & Matthew S. Yiu, 2002. "A Currency Board Model of Hong Kong," Working Papers 012002, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:012002

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    References listed on IDEAS

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    3. Fair, Ray C & Taylor, John B, 1990. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 381-392, Oct.-Dec..
    4. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November.
    5. Rose, Colin, 1995. "A statistical identity linking folded and censored distributions," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1391-1403, November.
    6. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    9. Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June.
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    12. Ma, Yue & Kanas, Angelos, 2000. "Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 135-152, February.
    13. Ma, Yue, 1992. "Policy Measurement for the Dynamic Linear Model with Expectations Variables: A Multiplier Approach," Computer Science in Economics & Management, Kluwer;Society for Computational Economics, vol. 5(4), pages 303-312, November.
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    Cited by:

    1. Sun, Huayu & Ma, Yue, 2005. "Policy strategies to deal with revaluation pressures on the renminbi," China Economic Review, Elsevier, vol. 16(2), pages 103-117.
    2. Huayu Sun & Yue Ma, 2005. "Balance of Payments Surplus and Renminbi Revaluation Pressure," Working Papers 032005, Hong Kong Institute for Monetary Research.

    More about this item


    currency board; stochastic simulation; certainty equivalence; Hong Kong;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications


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