The Credibility of Hong Kong's Link from the Perspective of Modern Financial Theory |
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| Authors: | HANS GENBERG CHO‐HOI HUI |
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| Institution: | 1. Hans Genberg is Assistant Director, Independent Evaluation Office, International Monetary Fund (E‐mail: hgenberg@imf.org).;2. Cho‐Hoi Hui is Division Head, Research Department, Hong Kong Monetary Authority (E‐mail: chhui@hkma.gov.hk). |
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| Abstract: | Hong Kong's linked exchange rate system (LERS) has been in operation since 1983, during which time many other fixed exchange rate systems have succumbed to shocks and/or speculative attacks. This paper investigates how market participants assessed changes made to the LERS by using the tools of modern finance to extract information from financial asset prices about market expectations. These changes have been characterized as making the system less discretionary over time. We find that decreasing the discretionary element of the LERS led to an increase in credibility of the arrangement. |
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| Keywords: | E42 G14 Hong Kong dollar linked exchange rate system target zone |
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