Hong Kong's Currency Board and Changing Monetary Regimes

Abstract

The paper discusses the historical background and institutional details of Hong Kong's currency board. We argue that its experience provides a good opportunity to test the macroeconomic implications of the currency board regime. Using the method of Blanchard and Quah (1989), we show that the parameters of the structural equations and the characteristics of supply and demand shocks have significantly changed since adopting the regime. Variance decomposition and impulse response analyses indicate Hong Kong's currency board is less susceptible to supply shocks, but demand shocks can cause greater short-term volatility under the system. The decent performance of Hong Kong's currency board is due mainly to the stable fiscal policy of its government. Counterfactual exercises also show that three-fourths of the reduction in observed output volatility and twothirds of that in observed inflation volatility are explained by the adoption of the currency board, while the remainder is explained by changes in the external environment, The improvement in stability does not rule out the possibility of monetaty collapse, however.

Currency Boards in the Baltic Countries: What Have We Learned?

“…Hong Kong reintroduced a currency board arrangement after a period of heightened instability in the foreign exchange market (for an assessment of Hong Kong's currency board see Kwan & Liu, 1996). In the Hong Kong regime, the Hong Kong dollar was pegged to the US dollar and bank notes were issued by three commercial banks.…”

A New Comparative Study on the Free‐floating and Currency Board Regimes in Hong Kong

“…Moreover, results from these models are consistent with the theoretical framework, such as aggregate supply and demand. Bayoumi and Eichengreen (), Cecchetti and Rich () and Kwan and Lui (, ) are examples which apply this approach.…”

“…Literature applying SVAR models to study Hong Kong's exchange rate regimes includes Gerlach‐Kristen (), Ma et al . (), and Kwan and Lui (, ).…”

“…Counterfactual analysis is often used to compare different exchange rate regimes in the literature. In addition to the work of Kwan and Lui (), counterfactual analysis methodology based on VAR models can be found in Fackler et al . ().…”

“…Existing literature, such as Kwan and Lui (, ) (K&L), has applied SVAR models to compare two exchange rate regimes in Hong Kong. However, K&L's study has its limitations in the model specification by assuming univariance in the residual matrix to recover SVAR parameters.…”