Real Exchange Rate Behaviour Under Hong Kong's Linked Exchange Rate System: An Empirical Investigation

Posted: 2 Nov 2006

See all articles by Zhichao Zhang

Zhichao Zhang

Durham University - Durham Business School

Abstract

In a behavioural equilibrium exchange rate model, this study investigates the movements of the real exchange rate of the Hong Kong dollar under the currency board arrangement from 1984 to 1998. Cointegration analysis based on Johansen approach is applied to derive the equilibrium real exchange rate in behavioural sense for the Hong Kong dollar. Evidence shows that during the period under investigation, the Hong Kong dollar was initially undervalued when the currency board arrangement was installed. It moved in closer line with the equilibrium rate after 1985 and generally remained moderately undervalued until 1993. Then the currency became overvalued following the upsurge of domestic demand and lingered into 1995 before an adjustment took place latter that year. But except for a few quarters, the overvaluation was not substantial and chronic. On the whole, the Hong Kong dollar seemed to have performed well in the period under examination. In most cases, the currency was actually undervalued. When the Asian financial crisis broke out, the currency was in effect already in a process of adjustment, depreciating form an overvalued level.

Keywords: Bahavioural equilibrium exchange rate model, Currency board, Hong Kong

Suggested Citation

Zhang, Zhichao, Real Exchange Rate Behaviour Under Hong Kong's Linked Exchange Rate System: An Empirical Investigation. International Journal of Theoretical and Applied Finance, Vol. 5, No. 1, pp. 55-78, February 2002, Available at SSRN: https://ssrn.com/abstract=941248

Zhichao Zhang (Contact Author)

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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