Should Hong Kong switch to Taylor Rule? Evidence from DSGE Model

David Meenagh, A. Patrick Minford and Zhiqi Zhao ()
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Zhiqi Zhao: Cardiff Business School

No E2021/6, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household-firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour, as represented by a VAR. We examined the economy s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility.

Keywords: Currency Board; Monetary Policy; Hong Kong; Indirect Inference (search for similar items in EconPapers)
JEL-codes: E52 F41 G5 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Journal Article: Should Hong Kong switch to Taylor rule?—Evidence from DSGE model (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2021/13

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