Currency Board System Research Articles

The Research on a Currency Board System: The Case of Hong Kong Region

The Currency Board System is a relatively old topic. But due to the successive increases of interest rates by the US Federal Reserve in 2022, the topic has received attention again. This paper will analyse the Currency Board System through a typical example-Hong Kong region. Firstly, the background of Currency Board System will be described. Then three conditions for the success of the Currency Board System will be analysed in the third part. After that, the suitable types of economy to apply the Currency Board System will be pointed out. Finally, it is recommend that different countries with different economic environment are better rationally implement the suitable exchange rate regime.

The Research on a Currency Board System: The Case of Hong Kong

The Currency Board System is a relatively old topic. But due to the successive increases of interest rates by the US Federal Reserve in 2022, the topic has received attention again. This paper will analyse the Currency Board System through a typical example-Hong Kong. Firstly, the background of Currency Board System will be described. Then three conditions for the success of the Currency Board System will be analysed in the third part. After that, the suitable types of economy to apply the Currency Board System will be pointed out. Finally, it is recommend that different countries with different economic environment are better rationally implement the suitable exchange rate regime.

Surplus Transfers from British Colonial Malaya

Martin Khor’s 1983 book on Malaysian economic dependence provided the first comprehensive estimates of the ‘colonial surplus’ from British Malaya. Khor described how Great Britain secured this from the colonial Malayan economy and estimated various types of surplus extracted via different means. Unsurprisingly, super-profits for privileged foreign capital owners are well known. The terms of trade have been important determinants of the colonial trade surplus. Financial surpluses are distinguished by those secured through the colonial currency board system, foreign commercial banks and colonial public finances, involving fiscal policy. The wealthy Malayan colony transferred funds to London at very low interest rates, but borrowed from British banks at exorbitant rates, besides paying high transactions charges. Colonial managerial privilege was also significant. Such surplus transfers were enabled by various colonial arrangements. Thus, colonial Malaya lost significant financial resources. Only some have changed in the post-colonial era, sometimes rather slowly. JEL Codes: B27, N15

The Bet of HK Currency Board System: Peg to US Dollar Gives Way to Peg to RMB

Given that the exchange rate of Hong Kong Dollar (HK Dollar) has repeatedly touched the exchange guarantee of the weak and the strong side during recent years beginning from 2008, some scholars began to hold suspicion to its stability. After studying the economic fundamentals, among them the nominal GDP growth rates and inflation rates, the author found that there are endogenous contradictions in economic basis between Hong Kong (HK) and the United States (US), making the linked exchange rate system expose its underbelly. This paper aims to explore the possibility that HK Dollar turns to peg to renminbi (RMB) by studying economic interactions between mainland China and Hong Kong. With the purpose of providing a clear vision in studying how the economic interactions have impacts on their capital flux, and how the mass of capital floods therefore affects the possibility of the peg of the two currencies, this study attempts to divide economic exchanges into direct and indirect factors, the former including goods trade, tourism services and direct investment and the latter mainly including entrepot trade. Based on the detailed data analysis, this research arrives at the conclusion that HK Dollar should peg to RMB also by conceiving the internationalism of RMB as the booster.

Will Bulgaria's Path to Eurozone Derail? A comparison with Argentina

In the wake of the prospects of Bulgaria joining the Euro area and the recent Eurozone crisis, it is pertinent to find out how parallel are the circumstances faced by the recent Bulgaria with the conditions of the then Argentina whose currency board had to be abandoned. In a nutshell, this paper compares Bulgaria in 2000-20101 to Argentina in 1991-2001, the period of the Argentine convertibility system. The dimensions explored are (1) adherence to currency board principles, (2) performance indicators associated with exchange rate fixity, and (3) conformity to the criteria inspired by the optimum currency areas (OCA) theory. Raw data are sourced from credible international organizations while computed data are analyzed using charts. On the whole, Bulgaria does bear a resemblance to Argentina and this poses a hindrance to the sustainability of its currency board system and to its hope for Eurozone accession.

Currency Board Policy and Economic Development of Bosnia and Herzegovina in the Context of European integration

Bosnia and Herzegovina is a small and open economy in transition with great distrust in local authorities and institutions. The country applies a currency board as the only acceptable and optimal exchange rate system in order to protect its monetary policy from political influences. The strict rules of the currency board provide monetary stability and confidence in the domestic currency, but disable the pursuit of discretionary monetary policy and limit autonomous fiscal policy for the purpose of stimulating an investment cycle and economic development without coordinated accompanying support of monetary policy.The subject of this paper is an analysis of the short-term and long-term effects of the currency board application in Bosnia and Herzegovina in conditions of increasing liberalization through the process of European integration. Given the negative consequences and limitations of the currency board system, this paper analyses in particular the possibility of introducing a central bank with discretionary monetary policy instruments, as well as other measures that can influence the overvaluation of the domestic currency exchange rate.The scientific methods used in the paper are: inductive-deductive method, descriptive method and statistical method. The conclusion and recommendations areobtained by using inductive-deductive method and descriptions of current economictrends based on numerous secondary statistical data presented in the tables andcharts.

Inflation, Employment and FDI in Bosnia and Herzegovina

The monetary policy of Bosnia and Herzegovina (hereinafter referred to as BIH) operates under the currency board system, responsible for strengthening the market economy and price stability. On the other hand, the economy of BIH is facing long-term unemployment, unfavorable business environment and feeble competitive position. This discourages economic development. Further retaining the currency board system in BIH attracts great interest. The paper analyzes the relation among inflation, unemployment and foreign direct investment (FDI). Statistical analysis (coefficient of correlation and simple linear regression (period 2004/2014)) indicates that there is no inversion similar to the Phillips curve between inflation and unemployment. Thus, it is implied that BIH renounces employment, aggregate demand and economic growth for the sake of stable prices. Moreover, the ratio of inflation and participation of FDI in GDP is inverse with a negligible correlation. Analyses demonstrate that there is no optimal combination of inflation and unemployment in BIH that would improve business environment and stimulate FDI and aggregate demand. Correlation and regression analyses fail to provide the arguments to statistically challenge the currency board as the monetary system model of BIH.

CHARACTERISTICS, STRUCTURE AND SUSTAINABILITY OF DEBT OF THE REPUBLIC OF SRPSKA

The aim of the research is to address the challenges that may be a constraint on economic growth and development. In the research, we used the relevant literature and acts that were in front of the delegates at the National Assembly of Republic of Srpska. The research question is: "What are the main characteristics of the Republic of Srpska's debt?" In line with this, the methods employed in this paper are the analysis and synthesis of previous researchs, theoretical findings and publicly accessible documents pertaining to the debt of Republic of Srpska, and an overview of the case studies. The contribution of the paper is reflected in the explained wideness and the possibilities of using different sources of money, and the limits on which the debts can be used in order to achieve sustainability tasks. We have concluded that this year, the Republic of Srpska bill has reached the largest amount of debt – KM 858 million (755 million principal and 103 million interest). In line with the presented evidence, priority should be given to projects that would be financed by advantageous credit arrangements and to rationalize public spending. Despite the usual opinion, we have proven that the debt of the Republic of Srpska is sustainable - the average interest rate is lower than the GDP growth rate and that, although unpopular, the currency board system corresponds to the position of Republic of Srpska. However, we have pointed out the danger of stereotype that the public debt of less than 60% necessarily indicates that the country is in a good position.

Krytí peněz v současnosti mýty, varianty a realita

There are many myths associated with gold, especially its historical role. Notably the supporters of free banking criticise the current monetary system and consider present money unbacked. This does not correspond to the fact that the money is backed by the assets of the issuers. There are demands to return to full gold backing. The analysis of the share of gold in the monetary base and in the monetary aggregates M1 and M2 for the United States of America and the Czech Republic over the period 1993-2016 shows a complete shortage of gold. The results are in units or tenths of percent. The author discusses some other unsolved issues, primarily the high price volatility and the impossibility of unlimited convertibility. Attention is also paid to currency board systems with full foreign currency backing. With the hypothetical admission of full gold backing, restricting the money supply by the amount of gold would quickly and dramatically curtail the supply of credit, with subsequent impacts on economic growth. Requirements for full gold backing of present money are completely illusory.

Property bubble in Hong Kong: A predicted decade-long slump (2016–2025)

Between 2003 and 2015 the prices of apartments in Hong Kong (adjusted for inflation) were multiplied by a factor of 3.8. This is more than in the United States prior to the so-called subprime crisis of 2007. The analysis of this speculative episode confirms the mechanism and regularities already highlighted by the present authors in similar episodes that occurred previously in other countries. Based on these regularities, it is possible to predict the price trajectory over the time interval 2016–2025. It suggests that, unless appropriate relief is provided by the mainland, Hong Kong will experience a decade-long slump. This bubble took considerable proportions largely because the currency board system through which Hong Kong interest rates are modeled on US rates made it impossible to “cool the market”. In fact, it resulted in loans with negative real interest rates.

Weakness in HK Currency Board System and Trading Opportunities in Betting A De-Peg of the Hong Kong Dollar

Hong Kong (HK) adopted the Linked Exchange Rate (LER) system in 1983, and it has been operating successfully for more than three decades. However, the maintenance costs for the LER system have grown exorbitantly and could outpace the costs of an exit, especially under the combined influence of a slow-down of the Chinese economy and a possible interest rate hike in the U.S. The HK government currently holds much more foreign reserves than it did preceding the 1997 Asian Financial Crisis. The HK government is also facing political unrest and growing anger of low income residents towards wealth inequality. This opposition could eventually force the HK government to abandon the Currency Board System. At present, the cost of exiting the LER ­system is small thanks to a strong HKD sustained by large capital inflows from mainland China. However, the time frame for such a low-cost exit is short.In our view, the HK government is likely to maintain the current system, even at high social and economic costs, in the expectation that changing external factors, such as the rebound of the Chinese economy, will relieve the de-pegging pressure. In this report, we explore several approaches to gauge the timing and risks of a de-pegging of the HKD and the collapse of the Chinese housing bubble. At the same time, we analyze the potential impact of a de-pegging on HK’s local companies and the most vulnerable parts of the system.

Hong Kong In-Depth Research Report Series-Timing When Speculating on De-Pegging and Other Trading Opportunities

This is the second in-depth report which discusses the possibility that the Kong Kong Dollar (HKD) will cease to be determined by the currency board system. In the previous report, the author discussed the unsustainability of pegging the HKD to the USD when the Chinese economy is deteriorating and the Fed is increasing interest rates. The first report proposed a de-pegging in the near future in order to mitigate costs while the HKD is still strong in view of capital inflows from the mainland. Such a decision could lead to a win-win situation for both the Hong Kong (HK) government and investors. However, governments frequently lack the capacity to choose the best options. Therefore, the HK government is likely to maintain the current system, even at a high social and economic cost, in the expectation that the environment will change and relieve it from pressure. This could happen, for example, if the Chinese economy rebounded. Considering that the HK government owns huge amounts of foreign reserves, it is not easy for investors to pick the best time to speculate on a de-pegging of the HKD. An HKD crisis might come about following a collapse of the housing bubble in mainland China. This report covers several methods which can be adopted to gauge the risks associated with a de-pegging of the HKD and a collapse of Chinese housing bubble. It is believed that the crisis will eventually come, whether the HKD is de-pegged or not, and there will be huge trading/arbitrage opportunities. In this regard, careful research and review of the HK government’s massive intervention during 1997 is insightful. At the same time, identifying the impact of a de-pegging on Hong Kong’s local companies and determining the most vulnerable parts of the system can increase investors’ chances of success. The recent development of the Hong Kong bond market might provide a good goal.

The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS‐VAR Models with Time‐Varying Transition Probabilities

AbstractThis paper employs a Markov regime‐switching VAR model to describe and analyse the time‐varying credibility of Hong Kong's currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This enables us to determine which changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We carry out extensive testing to search for the most appropriate specification of the Markov regime‐switching model. We find strong evidence of regime switching behaviour that portrays the time‐varying nature of credibility in the historical data.

The Competitiveness in the Light of the Balassa-Samuelson Effect

The paper aims to analyze the influence of the Balassa-Samuleson effect on the competitiveness of Bosniaand Herzegovina. As we know, theBalassa and Samuelson argue that developing economies have an appreciating currency, because they have relatively high inflation due to higher productivity growth in the production of tradable goods. This problem has existed, more or less, in all transitional countries in the EasternEurope, and it was particularly stressed in the countries with a fixed exchange rate. This paper just shows that in Bosnia and Herzegovina, in which monetary policy operates on the principles of "currency board", there is an extremely high influence of theBalassa-Samuelson effect, which leads not only to make a competitive position on the international market worse, but it brings up the question of sustainability of the existing currency board system.

PREREQUISITES FOR SUSTAINABLE GOVERNMENT BORROWING WITHIN CURRENCY BOARD SYSTEM

Abstract. Financial stability of an economy is one of the most important priorities in many countries around the world. Although in many cases financial resources are preferably generated within a given economy, often there is a necessity to borrow the funds abroad. In order to maintain the sustainability of the economy, the borrowing abroad also should comply with the certain respective regulations. Specific regulations depend on the peculiarities of the economy itself. There is a complex set of the factors to be considered when analyzing the sustainability of the economy. In this article, the importance of the monetary system arrangement is emphasized, namely the case of currency board system is analyzed. The aim of the paper is to reveal the prerequisites for sustainable government borrowing within currency board system.The main research methods used are systematization and generalization of the scientific literature, quantitative and qualitative analysis of the primary and secondary data, graphic presentation of the data and results. Also the case of Lithuania’s government borrowing is presented. For the evaluation of risk, @Risk package has been used. Conclusions of the paper provide the review of both general and the specific prerequisites for sustainable government borrowing within currency board system.DOI: http://dx.doi.org/10.5755/j01.ee.27.2.13753

Private Sector Activity in Hong Kong SAR and the Fed: Transmission Effects through the Currency Board

As the U.S. Fed begins to increase the Federal Funds rate, interest rates in Hong Kong SAR will rise in tandem under the Currency Board system. While domestic economic activity in Hong Kong SAR remained resilient in previous rate hike cycles, there is a concern that the impact of higher interest rates would be larger this time due to historic high levels of leverage in both household and corporate sectors. However, macroprudential measures have contained the debt service burden among new borrowers and leverage quality of corporate sector is healthier than its peers in the region. Empirical estimations of aggregate consumption and corporate investment show that private domestic demand is likely to remain robust with the anticipated gradual increase in interest rates over the next few years and taking into account the buffers in the system.

Hong Kong In-Depth Research Report Series - Monetary Policy Section

Hong Kong (HK) adopted the Linked Exchange Rate system in 1983 and it has been operating successfully for more than three decades. However, the maintenance costs of the system have become huge and they might outpace the exit costs, especially under the combined influence of a slow-down of the Chinese economy and an interest rate hike in the U.S. Compared with the Asian Financial Crisis in 1997, the HK government owns much larger foreign reserves at present than it did then. The HK government is also facing a much more severe populist political environment and the anger of low income residents towards wealth inequality. The anger of low income residents could be “the last straw that breaks the camel’s back” in terms of the HK government maintaining the Currency Board System. At present the cost of exiting the Linked Exchange Rate system is small thanks to capital inflows from Mainland China. However, the time horizon for the existence of such a good exit opportunity is short. There are two ways in which investors can speculate on an exit from the Currency Board System but political reasons weigh the most heavily. If investors speculate on a de-pegging strategy at present and bet on a strengthening HKD, their actions are “politically correct” and they might receive less hostility or even acquiescence from the HK government. Consequently, investors have a much greater chance of success compared to adopting a “double down” strategy to capitalize on the HKD depreciating when the Chinese economy experiences a hard landing.

Private Sector Activity in Hong Kong SAR and the Fed: Transmission Effects Through the Currency Board

As the U.S. Fed begins to increase the Federal Funds rate, interest rates in Hong Kong SAR will rise in tandem under the Currency Board system. While domestic economic activity in Hong Kong SAR remained resilient in previous rate hike cycles, there is a concern that the impact of higher interest rates would be larger this time due to historic high levels of leverage in both household and corporate sectors. However, macroprudential measures have contained the debt service burden among new borrowers and leverage quality of corporate sector is healthier than its peers in the region. Empirical estimations of aggregate consumption and corporate investment show that private domestic demand is likely to remain robust with the anticipated gradual increase in interest rates over the next few years and taking into account the buffers in the system.

Accession to the Eurozone as Lithuania’s exit strategy from the currency board system

In the years 2004-2014 the Lithuania’s exchange rate policy was based on a rigid currency board system. After a period of uncontested success in the fight against inflation in the first decade of the transition and economic growth, entering the ERM II in 2004 and efforts to adopt the euro were treated as an optimal exit strategy from the currency board system. However, the consequences of this exchange rate system in the following years (until 2014) prevented Lithuania from meeting the economic convergence criteria. The starting point for the research is based on the theoretical analysis of literature studying benefits and risks associated with the use of the currency board system by the monetary authorities. The empirical analysis refers to the case of Lithuania and covers the years 2004-2014. The purpose of this analysis is to look at the effects of the use of the currency board system from the perspective of the convergence criteria of monetary nature and the extent of their implementation in the absence of opportunities for autonomous monetary policy.

Government Debt Stabilization in a Small Open Economy within Currency Board System

Sustainability of government debt is a finance priority in most countries of the world. Ideally, government debt should be sustainable at all times. Unfortunately, this is almost never the case in contemporary stochastic economy. Therefore, government debt stabilization tools are employed to contribute to the sustainability of the government debt or maintain the acceptable level of the debt. Selection of government debt stabilization tools depends on many factors, one of which is monetary policy arrangement. Such factors as size and openness of the economy are also crucial for development of government debt management strategy.The objective of the paper is to analyse the peculiarities of government debt stabilization in a small open economy within currency board system.The main research methods used are systematization and generalization of the scientific literature, quantitative and qualitative analysis of the primary and secondary data, case study, scenario method, graphic presentation of the data and results.C***onclusions of the paper provide the brief review of the main results and findings, revealing the peculiarities of plausible tools and strategy for government debt stabilization in a small open economy within currency board system.