Exchange Market Pressure and the Credibility of Macau's Currency Board
Jorge Braga de Macedo
New University of Lisbon - Faculty of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
New University of Lisbon
Luis Brites Pereira
Center for Globalization & Governance (CG&G) - NOVA University of Lisbon; Tropical Research Institute of Portugal (IICT)
Luis C. Nunes
Universidade Nova de Lisboa - Faculdade de Economia
FEUNL Working Paper No. 492
In this study, we assess the credibility of the currency board arrangement (CBA) of the Macau Special Administrative Region by studying the relationship between exchange market pressure (EMP) and the anchors of a rule-based CBA, namely, interest rate arbitrage, exchange rate arbitrage and economic discipline. A pure CBA signals its credibility by allowing the first two anchors to function automatically and by pursuing sound fiscal policies. The analysis' results suggest that Macau's CBA has been characterised by a state of low volatility since late 1992, with the brief exception of the East Asian financial crisis period. The paper's main finding is that fiscal fundamentals seem to have a more pronounced role in reducing EMP's variability during periods of low volatility whilst interest rate arbitrage is more important in periods of high volatility. We conclude that Macau's CBA is credible at present as reflected in the low frequency of observed EMP, in the narrowing of Macau's interest rate differential vis-à-vis U.S. interest rates and in Macau's substantial fiscal reserves.
Number of Pages in PDF File: 33working papers series
Date posted: September 4, 2006
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