The Vanishing Intermediate Regime and the Tale of Two Cities: Hong Kong versus Singapore

Abstract

Following the East Asian crisis, some prominent economists have advocated that small and open economies in Asia adopt an irrevocably fixed regime. Such a hard peg, it is argued, signals greater commitment to rule out arbitrary exchange rate adjustments as well as the authorities (IM) willingness to subordinate domestic policy objectives such as output and employment growth to the maintenance of the pegged exchange rate. But is this a reasonable position to adopt? In order to answer this question, we consider and contrast the experiences of Hong Kong and Singapore. While both of these economies share a number of similarities, the former operates a US dollar-linked currency board regime and the latter maintains an adjustable peg in the form of a monitoring band arrangement with the central parity based on a trade-weighted currency basket.