Assessing the Credibility of the Convertibility Zone of the Hong Kong Dollar

Abstract

The features under the two-sided Convertibility Zone of the Hong Kong dollar resemble in many ways the target zone exchange rate regime in the literature. Following Tronzano et al. (2000), this paper utilises a Bayesian extension of Svensson (1991) test, which takes into account the exchange rate movement and the differential between domestic and foreign interest rates, to assess the credibility of the Convertibility Zone since it was introduced in May 2005. The empirical evidence suggests that the Hong Kong Monetary Authority has been successful in building a high degree of credibility in maintaining the Convertibility Zone.

Keywords: Bayesian Analysis, Credibility, Convertibility Zone, Markov Chain Monte Carlo

JEL Classification: C11, C15, C22, F31