The Impacts of Hong Kong's Currency Board Reforms on the Interbank Market

Abstract

Among the economies with a Currency Board System, Hong Kong is probably the one with (a) the largest and most developed financial sector, and (b) the highest capital mobility. Hence, studying Hong Kong's Currency Board System is not only crucial to Hong Kong, but also important for the understanding of the modern Currency Board System. This paper outlines the major monetary reforms in Hong Kong since the late 1980s. The impacts of these reforms and the 1997/98 Asian Financial Crisis are then examined empirically. We focus on the differentials between the US and Hong Kong interbank interest rates. Generalized autoregressive conditional heteroscedasticity (GARCH) models are used to capture the time-varying level and volatility of the differentials. In light of the empirical results we provide an assessment of the reforms in Hong Kong.