SMU ECONOMICS & STATISTICS WORKING PAPER SERIES Exchange-Rate Systems and Interest-Rate Behaviour: The Experience of Hong Kong and Singapore

Abstract: In this paper we consider the implications of the two different exchange-rate systems in Hong Kong (HK) and Singapore (SP) on the economic performance of these two economies. While HK has a pegged exchange-rate regime under a currency board system (CBS), SP has a managed-float system with monitoring band. We examine whether the managed-float system of SP provides an advantage over the rigid CBS of HK in mitigating the recession caused by the Asian Financial Crisis (AFC), and the implications of the differences in the exchange-rate systems on interest-rate behaviour. Our empirical results show that the monitoring band system in SP has not only allowed a greater flexibility in the choice of the exchange rate, but also a greater autonomy in the choice of interest rate to mitigate the crisis, recession or overheating