A Currency Board Model of Hong Kong
29 Pages Posted: 23 Aug 2007 Last revised: 26 Jul 2022
Date Written: January 1, 2002
This working paper was written by Yue Ma (Lingnan University), Guy Meredith (International Monetary Fund) and Matthew S. Yiu (Hong Kong Institute for Monetary Research).
The need for a deeper understanding of the operation of Hong Kong's currency board arrangements was highlighted during the Asian financial crisis in 1998. A model-based approach built on hypothetical stochastic simulations would be useful for this purpose. This paper develops a new procedure of implementing stochastic simulations in a currency board model for Hong Kong. Our new procedure is useful in the context of a nonlinear model with forward-looking expectations under conditions of noncertainty- equivalence, such as the model of Hong Kong's currency board. A simple target-zone model of the exchange rate is used as an example to illustrate the difference between our new simulation procedure and existing procedures in the literature. Finally, the new procedure is applied to the currency board model to investigate the stochastic properties of endogenous variables under a wide range of shocks.
Keywords: currency board, stochastic simulation, certainty equivalence, Hong Kong
JEL Classification: F31, E47, C15
Suggested Citation: Suggested Citation
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By Peter Quirk