Should Hong Kong switch to Taylor rule?—Evidence from DSGE model. Issue 50 (27th October 2022)

• Record Type: Journal Article
• Authors: Zhao, Zhiqi; Meenagh, David; Minford, Patrick
• Is Part Of: Applied economics. Volume 54:Issue 50(2022)
• Page Start: 5851
• Page End: 5872
• Publication Date: 2022-10-27
• Subjects: Currency board -- monetary policy -- Hong Kong -- Indirect Inference; E52 -- F41 -- C51; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2022.2053655
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour as represented by a VAR. We examined the economy's volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility.