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Do Hong Kong SAR and China Constitute An Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis

Author

Listed:
  • Ms. Hong Liang

Abstract

The paper explores the behavior of the long-run real exchange rate (RER) of Hong Kong SAR and China by testing the generalized-purchasing power parity hypothesis (G-PPP). The hypothesis argues that if the fundamental variables determining RERs are sufficiently integrated, as in a currency area, the RERs should share common trends. The findings of this study suggest (1) at present, Hong Kong SAR and China do not satisfy the conditions necessary for forming an optimal currency area by themselves; (2) when Japan and the United States are added to the group, common trends can be found; and (3) the long-run elasticity between the RERs of Hong Kong SAR and China is negative.

Suggested Citation

  • Ms. Hong Liang, 1999. "Do Hong Kong SAR and China Constitute An Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis," IMF Working Papers 1999/079, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/079
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    Citations

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    Cited by:

    1. Bystrom, Hans N.E. & Olofsdotter, Karin & Soderstrom, Lars, 2005. "Is China an optimum currency area?," Journal of Asian Economics, Elsevier, vol. 16(4), pages 612-634, August.
    2. Shu-ki Tsang, 2002. "Optimum Currency Area for Mainland HCina and Hong Kong? Empirical Tests," Working Papers 162002, Hong Kong Institute for Monetary Research.
    3. repec:ebl:ecbull:v:6:y:2008:i:29:p:1-13 is not listed on IDEAS
    4. Mulatu F. Zehirun & Marthinus C. Breitenbach & Francis M. Kemegue, 2015. "Assessment of Monetary Union in SADC: Evidence from Cointegration and Panel Unit Root Tests," Working Papers 201502, University of Pretoria, Department of Economics.
    5. Xu, Xinpeng, 2006. "A currency union for Hong Kong and Mainland China?," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 894-911, October.
    6. Hiroyuki Taguchi, 2010. "Feasibility of Currency Unions in Asia - An Assessment Using Generalized Purchasing Power Parity -," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(5), pages 859-872, June.
    7. Poomthan Rangkakulnuwat & Sung Ahn & Holly Wang & Susan He, 2010. "Extended generalized purchasing power parity and optimum currency area in East Asian countries," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 497-513.
    8. Taufiq Choudhry, 2005. "Asian Currency Crisis and the Generalized PPP: Evidence from the Far East," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 137-157, June.
    9. Zhaoyong Zhang & Kiyotaka Sato, 2008. "Whither A Currency Union in Greater China?," Open Economies Review, Springer, vol. 19(3), pages 355-370, July.
    10. Sergio Da Silva & Leandro Stocco & J. Anchieta Neves, 2008. "Is Mercosur an optimum currency area? An assessment using generalized purchasing power parity," Economics Bulletin, AccessEcon, vol. 6(29), pages 1-13.
    11. Neves, J. Anchieta & Stocco, Leandro & Da Silva, Sergio, 2007. "Is Mercosur an optimum currency area?," MPRA Paper 2758, University Library of Munich, Germany.

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