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The Hong Kong Currency Board During the 1997–8 Crisis: Problems and Solutions
Author(s) -
Chen Naifu
Publication year - 2001
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/1468-2443.00017_2_1-2
Subject(s) - devaluation , currency , monetary economics , currency crisis , currency board , economics , reserve currency , capital (architecture) , interest rate , foreign exchange risk , business , financial system , international economics , archaeology , history
The note‐based Hong Kong currency board was ineffective in dealing with currency speculations at the start of the Asian financial crisis in 1997. The makeshift modification implemented by the Hong Kong Monetary Authority imposed implicit controls on the capital outflow and produced high and volatile interest rates. There are simple solutions. We examine the merits and evidence related to the issuance of currency put options by the monetary authority as a commitment against devaluation. Furthermore, a simple mechanism linking the domestic credit demand to the reserve currency base will induce proper interest‐rate dynamics for a currency board to function properly.