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Optimum Currency Area for Mainland HCina and Hong Kong? Empirical Tests

  • Shu-ki Tsang

    (Hong Kong Baptist University)

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    After the political unification of Hong Kong with China, Hong Kong is supposed to function as a separate economic entity under the framework of ¡§one country, two systems¡¨. However, the increasingly close ties between the two economies, particularly in recent years, have raised the possibility of full economic integration despite political constraints, and even of monetary union as the Chinese currency progresses towards full convertibility. This paper employs the theory of optimum currency area (OCA) and adopts two techniques over a range of economic variables to test whether Mainland China and Hong Kong constitute an OCA. The historical results presented in this paper are very sceptical of a positive answer. Empirical findings based on disaggregated data show some signs of nominal and real convergence only between Hong Kong and parts of Eastern China, driven by trade. This seems to be consistent with the actual trajectory of economic integration. However, all other results, even those based on higher frequency price data, point to a lack of evidence that Hong Kong and Mainland China as a whole as yet constitute an OCA.

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    File URL: http://www.hkimr.org/uploads/publication/293/ub_full_0_2_32_wp200216_text.pdf
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    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162002.

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    Length: 27 pages
    Date of creation: Sep 2002
    Date of revision:
    Handle: RePEc:hkm:wpaper:162002
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    1. Artis, M. & Kohler, M. & Melitz, J., 1998. "Trade and the Number of OAC's in the World," Economics Working Papers eco98/16, European University Institute.
    2. Lafrance, Robert & St-Amant, Pierre, 1999. "Optimal Currency Areas: A Review of the Recent Literature," Working Papers 99-16, Bank of Canada.
    3. Ronald I. McKinnon, 2001. "After the Crisis, The East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging," Working Papers 042001, Hong Kong Institute for Monetary Research.
    4. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
    5. Vaubel, Roland, 1976. "Real exchange-rate changes in the European Community: The empirical evidence and its implications for European currency unification," Kiel Working Papers 39, Kiel Institute for the World Economy.
    6. Stephen Ching & Michael B. Devereux, 2003. "Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 674-691, 09.
    7. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
    8. Jacques Mélitz, 1995. "A suggested reformulation of the theory of optimal currency areas," Open Economies Review, Springer, vol. 6(3), pages 281-298, July.
    9. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
    10. Boltho, Andrea, 1989. "European and United States Regional Differentials: A Note," Oxford Review of Economic Policy, Oxford University Press, vol. 5(2), pages 105-15, Summer.
    11. Melitz, Jacques, 1993. "The Theory of Optimum Currency Areas, Trade Adjustment and Trade," CEPR Discussion Papers 847, C.E.P.R. Discussion Papers.
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