Dundee Discussion Papers in Economics 228:A soft edge target zone model: theory and application to Hong Kong

Hong Kong’s currency is pegged to the US dollar in a currency board arrangement. In autumn 2003,the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate regimes, to explain the notable achievement of speculative peace and credibility since May 2005

A soft edge target zone model: Theory and application to Hong Kong

Hong Kong’s currency is pegged to the US dollar in a currency board arrangement. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate regimes, to explain the notable achievement of speculative peace and credibility since May 2005.currency board arrangement; target zone model; credibility; Hong Kong

Estonian Monetary System: Reconstruction, Performance, and Future Prospects

Nearly twenty years have passed since the beginning of the transition from the planned economy to the market economy system in Estonia. A successful transition to a market economy requires a sound currency and Estonia introduced its own currency in June 1992. Estonia has been quite successful in achieving economic stability and growth and steadily declining inflation. An essential element of Estonia?s economic development success has been the currency board-based monetary system that has served as a signal of commitment to prudent monetary policy and as a guarantee of sound money during the transition period. We discuss the experience of operating the currency board in Estonia and future prospects of the currency board arrangement in Estonia in the framework of the European Union and the future joining the Economic and Monetary Union. --monetary system,currency reform,currency board,monetary policy

Zimbabwe’s Currency Crisis: Which Currency To Adopt In The Aftermath Of The Multi-Currency Regime?

The study presented main features of possible currency options which can be potentially adopted by Zimbabwe in the aftermath of multi-currency regime. The currency options analyzed are dollarization, joining the CMA and re-introduction of the Zimbabwe dollar (Z$). The proposed management systems to underpin the reintroduction of the Zimbabwean dollar are currency board, free banking and Reserve Bank of Zimbabwe (RBZ). For each of the options analyzed, the practicality of Zimbabwe in adopting and/or implementing such currency was also explained. Although any of the three options could be adopted and implemented, the study considered the options in the following descending order of priority: (i) dollarization, (ii) retaining the Z$ but under the management system of a currency board, (iii) Joining the CMA, (iv) retaining the Z$ under the management of RBZ, with the institution having new management, and lastly (v) free banking.Multi-currency; hyperinflation; dollarization; currency board; free banking

Hong Kong's Currency Board and Changing Monetary Regimes

The paper discusses the historical background and institutional details of Hong Kong's currency board. We argue that its experience provides a good opportunity to test the macroeconomic implications of the currency board regime. Using the method of Blanchard and Quah (1989), we show that the parameters of the structural equations and the characteristics of supply and demand shocks have significantly changed since adopting the regime. Variance decomposition and impulse response analyses indicate Hong Kong's currency board is less susceptible to supply shocks, but demand shocks can cause greater short-term volatility under the system. The decent performance of Hong Kong's currency board is due mainly to the stable fiscal policy of its government. Counter-factual exercises also show that three-fourths of the reduction in observed output volatility and two-thirds of that in observed inflation volatility are explained by the adoption of the currency board, while the remainder is explained by changes in the external environment. The improvement in stability does not rule out the possibility of monetary collapse, however.

The Evolution of the Hong Kong Currency Board during Global Exchange Rate Instability: evidence from the Exchange Fund Advisory Committee 1967-1973

During the 1990s there was considerable enthusiasm for currency boards, particularly for small open economies, until the collapse of the Argentine system in 2001-2 and the subsequent decline of the USD. Since then, currency boards have been used mainly by colonies and by Eastern European countries seeking to dispel the shadow of chaotic monetary episodes by operating currency boards pegged to the Euro. Hong Kong SAR is now by far the largest economy to operate a currency board and no longer conforms either to the colonial rationale, nor to the regime change rationale for a currency board. This system has recently become more controversial because of the intensified economic integration with the mainland, the decline of the USD on world markets and the appreciation of the RMB against the HKD since it adopted a flexible basket peg in July 2005. Several authors who have noted the relatively poor performance of Hong Kong relative to Singapore have recommended a monitored band system similar to Singapore, although this advice came before the RMB regime was changed. In this context, it is timely to reconsider why Hong Kong abandoned the currency board under similar circumstances when their anchor currency was depreciating on world markets, the RMB was appreciating against the HKD and the international monetary system appeared on the brink of disarray.

Exchange Rate Volatility and Macroeconomic Performance in Hong Kong.

In this paper evidence on whether Hong Kong's currency board arrangement, in place since 1983, has affected volatility of real macroeconomic variables is presented. 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 it is found that the currency board period is one of low macroeconomic volatility.EXCHANGE RATE ; MACROECONOMICS ; FORECASTS

Design and Operation of Existing Currency Board Arrangements

This paper summarizes recent literature on the experience of some existing currency boards. It begins with the definition of the currency board and the description of some existing currency boards. It then discusses advantages and disadvantages of implementing the currency board regime, and concludes with a list of conditions that must be satisfied if a country wants to adopt this monetary framework.currency board

Beliefs about Exchange-Rate Stability: Survey Evidence From the Currency Board in Bulgaria

We use unique survey data from Bulgaria’s currency board to examine the reasons for persistent incomplete credibility of a financial stabilization regime. Although it produced remarkably positive effects in terms of sustained low inflation since 1997, the currency board has not achieved full credibility. This is not uncommon in other less-developed countries with fixed exchange rate regimes. Our results reveal that incomplete credibility is explained primarily by concerns about external economic shocks and the persistent high unemployment in the country. Past experiences with high inflation do not rank among the top reasons to expect financial instability in the future.http://deepblue.lib.umich.edu/bitstream/2027.42/40091/3/wp705.pd

Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective (Groups of interest and monetary variables during the Currency Board introduction in Bulgaria)

The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions.institutional change, monetary regime, Currency Board, transition, Bulgar