Credibility of Hong Kong's Currency Board
Credibility of Hong Kong's Currency Board
The Role of Institutional Arrangements
This chapter provides a valuable history of the operations of the Hong Kong Monetary Authority (HKMA)—the de facto central bank of Hong Kong—and attempts to measure the credibility of the system under the rule-based regimes or under the discretion regime. The chapter is organized as follows. Section 7.2 discusses the historical background of Hong Kong's currency board, emphasizing the events during the financial crisis. It shows that the currency board has gone through three regimes as demarcated by the choice of rules versus discretion. Section 7.3 develops and implements empirical tests on the credibility of the currency board under different regimes. Section 7.4 discusses the effect of rules and discretion on the credibility of Hong Kong's currency board system from the point of view of delegation of functions and the incentive to intervene. The final section concludes. It is shown that the HKMA was far more credible in the period during which it followed rules than when there was more discretion in its operations. The use of discretion at the time of the Asian crisis contributed to the erosion of market confidence and made a speculative attack on the currency more likely. Two commentaries are included at the end of the chapter.
Keywords: Hong Kong Monetary Authority, monetary policy, Asian financial crises, rule-based regime, discretion regime, currency board
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