Currency Substitution in a Currency Board Context: The Evidence for Hong Kong

Kwan Wai Ko and Jagdish Handa

Journal of Chinese Economic and Business Studies, 2006, vol. 4, issue 1, 39-56

Abstract: Hong Kong is an open economy that uses foreign currencies extensively in domestic payments. This paper focuses on substitution between the domestic and foreign currencies in their role as media of payments in such an economy. It uses quarterly data to estimate currency substitution (CS) for Hong Kong during 1984:I to 2001:III when it had a fixed exchange rate under a currency board system. Two models, a money demand function and a dynamic adjustment model, are estimated using the Johansen cointegration and error-correction technique. The estimates for both these models indicate significant CS in the media of payments. Our estimates also show a significant ratchet effect in CS.

Keywords: Currency substitution; currency board; China (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1080/14765280600551224

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