Exchange Rate Volatility and Macroeconomic Performance in Hong Kong.

Abstract

This working paper was written by Mark Crosby (University of Melbourne).

This paper presents evidence on whether Hong Kong's currency board arrangement, in place since 1983, has affected the volatility of real macroeconomic variables. Simple evidence on the relative volatilities of relevant macroeconomic variables, pre and post, 1983 is presented, before a more formal econometric framework is utilised to examine the linkages between the exchange rate and the real economy. It is found that the currency board period has been one of relative stability in Hong Kong, though it has also been a period where external factors have been relatively benign. Even after controlling for the external environment, however, it is found that the currency board period is one of low macroeconomic volatility.