Hong Kong's Currency Board and Changing Monetary Regimes

Yum K. Kwan and Francis Lui

No 5723, NBER Working Papers from National Bureau of Economic Research, Inc

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. Counter-factual exercises also show that three-fourths of the reduction in observed output volatility and two-thirds 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 monetary collapse, however.

JEL-codes: E5 F4 (search for similar items in EconPapers)
Date: 1996-08
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Citations: View citations in EconPapers (23)

Published as Changes in Exchange Rates in Rapidly Developing Countries. Ito,Takatoshiand Anne O. Krueger, eds., Chicago: The University of Chicago Press, 1999,pp. 403-429.
Published as Hong Kong's Currency Board and Changing Monetary Regimes , Yum K. Kwan, Francis Lui. in Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues , Ito and Krueger. 1999

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