The...

The Hong Kong currency board arrangement (CBA) is reviewed historically and tested empirically, in terms of its ability to “fix ” the officially announced exchange rate of HK$7.80/US $ since October 1983. We confine our attention to the CBA’s technical viability. Keeping track of all major documents and reports, the historical review is based on a detailed account of the institutional changes in the system while the empirical part relies on econometric techniques. The key theoretical and institutional hypothesis of ours is that the system behaved like a narrow target zone, before the seven technical measures implemented by the Hong Kong Monetary Authority (HKMA) in September 1998 that turned the system into a more self-adjusting entity with an effective currency arbitrage mechanism. Credibility tests and mean-reversion tests are applied to historical data. The findings point to a Hong Kong CBA that suffered periodic shocks and attacks, yet showing an ability to return to a mean, with the notable exception of the several months following the speculative attack in 1997. While elements of the defense mechanism of a classical CBA contributed partly to this relative robustness, it was also a result of the HKMA’s intervention in the foreign exchange and the money markets. Acknowledgement The article is a product of a research project “The Linked Exchange Rate as a Currency Board System