Linked Exchange Rate in Hk
Central Banking (FIN10908)
Hong Kong Linked Exchange Rate System
Hong Kong Linked Exchange Rate System Introduction
Hong Kong’s Linked Exchange Rate system is a currency board system, which requires both the stock and flow of the monetary base to be fully backed by foreign reserves. It is the exchange rate system implemented in Hong Kong to stabilize the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD). This means that any change in the monetary base is fully matched by a corresponding change in foreign reserves at a fixed exchange rate. (1)(2)
The Hong Kong Monetary Authority (HKMA) is Hong Kong 's currency board and central banking authority. And it authorizes note-issuing banks are to issue new banknotes provided that they deposit an equivalent value of US dollars with the HKMA. (3)
The Reasons for Choosing Anchor Currency and The Advantages of US Dollar Being Anchor Currency in Hong Kong
When we select the anchor currency, we should take into account the currency denomination of external trade and financial transactions, as well as the credibility and stability of the monetary regime governing that currency.
Therefore, the US dollar is suitable for being HK dollar’s anchor currency, because US dollar is the predominant currency in which trade in Hong Kong and external financial transactions are denominated. (4)
The choice of the US dollar as an anchor is logical, since it is the predominant foreign currency in which our external trade and financial transactions are denominated
Also, link to US dollar, Hong Kong can benefit from a largely stable monetary environment in the US and the unparalleled credibility of US monetary policy.
The Disadvantages of US Dollar Being Anchor Currency in Hong Kong
Interbank interest rates in Hong Kong normally follow closely the movements of United State under the Linked Exchange Rate system. It ties Hong Kong to US monetary policy at times when the economic cycles
Hong Kong Linked Exchange Rate System
Hong Kong Linked Exchange Rate System Introduction
Hong Kong’s Linked Exchange Rate system is a currency board system, which requires both the stock and flow of the monetary base to be fully backed by foreign reserves. It is the exchange rate system implemented in Hong Kong to stabilize the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD). This means that any change in the monetary base is fully matched by a corresponding change in foreign reserves at a fixed exchange rate. (1)(2)
The Hong Kong Monetary Authority (HKMA) is Hong Kong 's currency board and central banking authority. And it authorizes note-issuing banks are to issue new banknotes provided that they deposit an equivalent value of US dollars with the HKMA. (3)
The Reasons for Choosing Anchor Currency and The Advantages of US Dollar Being Anchor Currency in Hong Kong
When we select the anchor currency, we should take into account the currency denomination of external trade and financial transactions, as well as the credibility and stability of the monetary regime governing that currency.
Therefore, the US dollar is suitable for being HK dollar’s anchor currency, because US dollar is the predominant currency in which trade in Hong Kong and external financial transactions are denominated. (4)
The choice of the US dollar as an anchor is logical, since it is the predominant foreign currency in which our external trade and financial transactions are denominated
Also, link to US dollar, Hong Kong can benefit from a largely stable monetary environment in the US and the unparalleled credibility of US monetary policy.
The Disadvantages of US Dollar Being Anchor Currency in Hong Kong
Interbank interest rates in Hong Kong normally follow closely the movements of United State under the Linked Exchange Rate system. It ties Hong Kong to US monetary policy at times when the economic cycles
Bibliography: 1. Jao YC. (2001). The Asian Financial Crisis and the Ordeal of Hong Kong. Chapter 5. Quorum, Greenwood 2 3. The Hong Kong Monetary Authority /Key Functions/Monetary Stability (Accessed at www.hkma.gov.hk 20 May, 2013) 4. Salvatore, Dominick (2004). International Economics. Chapter 7. John Wiley & Sons 5. Bordo, Michael D.; MacDonal, Ronald (2001) 6. HKMA Press Release - Hong Kong’s Latest Foreign Currency Reserve Assets Figures Released (Accessed at www.hkma.gov.hk 20 May, 2013) 7 8. Hong Kong 's Linked Exchange Rate System (2nd edition, April 2013) (Accessed at www.hkma.gov.hk 20 May, 2013) May, 2013 1645 Words