Abstract
A currency board arrangement (CBA) is supposed to be robust against attacks. Currency substitution complicates life, with controversial implications for floating versus fixed exchange rate regimes. After reporting evidence of currency substitution in Hong Kong, a monetary model incorporating currency substitution is used to estimate the shadow exchange rate and the probability of speculative attack on the Hong Kong dollar. A decomposition analysis of a Markov-switching model indicates that the no-attack regime was the most durable one. This implies that Hong Kong's quasi CBA was relatively robust against both speculative attacks and currency substitution.
| Original language | English |
|---|---|
| Pages (from-to) | 53-78 |
| Number of pages | 26 |
| Journal | Journal of International Money and Finance |
| Volume | 21 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Feb 2002 |
Funding
sThe paper benefited from comments by an anonymous referee and the participants in the international conference on ‘Exchange Rate Stability and Currency Board’, organized by the Department of Economics, Hong Kong Baptist University, 28–29 November 1998. We are also grateful to Chang-Jin Kim for his helpful suggestions on modifying his programme to estimate our three-state Markov-switching model. However, we are responsible for any remaining errors.
Keywords
- Currency board
- Currency substitution
- Hong Kong
- Markov-switching model
- Speculative attack