Is the Linked Exchange Rate System Still Viable in Hong Kong – A Comparative Analysis with Singapore

This thesis applies the theory of optimum currency area (OCA) to the case of two small, open economies, Hong Kong and Singapore to see if a fixed exchange rate functions as the best exchange rate regime for them. It examines the costs and benefits of the linked exchange rate system which was established in Hong Kong in 1983 by applying a list of selected OCA criteria. This thesis further provides a comparative analysis on the economic implications of the two distinctive exchange rate systems in Hong Kong and Singapore: while Hong Kong has adopted a pegged exchange rate regime under a currency board system, Singapore operates a managed-float system that links its target rate to a basket of currencies of its major trading partners. The findings suggest that the managed-float system in Singapore has not only allowed for greater monetary autonomy during economic cycles, but also offered greater flexibility to cushion external shocks