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

Shu-ki Tsang
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Shu-ki Tsang: Hong Kong Baptist University

No 162002, Working Papers from Hong Kong Institute for Monetary Research

Abstract: 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.

Pages: 27 pages
Date: 2002-09
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