The Regime-Dependent Evolution of Credibility: A Fresh Look at Hong Kong's Linked Exchange Rate System

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractAn estimated Markov-switching DSGE modelling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong's linked exchange rate system. The model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. These findings contribute to efforts at modelling exchange rate regime credibility as a non-linear process with two distinct regimes.

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

“…The result in the last panel of Figure 14 echoes the empirical DSGE model findings of Blagov and Funke (2013), where the regime of low-credibility of the currency board is prevalent at the end of the 1987 up to 1992 and from the second quarter of 1997 to the end of 1999 and there is a lone spike in the beginning of 2005. The forward premium on the HKD leaves us with almost the same picture, with the minor exception of a drop in the first quarter of 1998.…”

“…In terms of the prevalent second regime, Figure 8 does not offer additional insight compared to the HSVI index with some minor exceptions around the dot-com bubble and the boom in the middle of the nineties. The model still identifies the stock-market crash of 1987, the Asian crisis and the Russian crisis as the periods of increased interest rate spread rate volatility as well as the 2004-2009 period in contrast to Blagov and Funke (2013). Probability of staying in the first regime (top).…”

“…11 Figure 6 depicts the transition probabilities for both states (top and middle) plus the probability of the realization of the second state (bottom). The model locates the system was in the second regime after the stock-market crash of 1987 an all the way up to the end of 1991, as in Blagov and Funke (2013). Then, the probability peaks at one again during the Asian and Russian crises and there is a lone spike around the dot-com bubble.…”

“…While the empirical nature of the method does not allow us to attach a structural interpretation to the regimes, the dynamics of the system mirror the analysis of an earlier work by Blagov and Funke (2013) who isolate the effects of credibility loss in a structural Markov-Switching DSGE model. The macroeconomic variables do not react to widening of the spread during the first regime, which replicates the responses in the high credibility regime.…”

“…Genberg and Hui (2011) have provided econometric evidence using option-based measures. Blagov and Funke (2013) have analysed the time-varying credibility of Hong Kong's currency board system employing a structural open-economy MS-DSGE modelling framework with conventional New Keynesian foundations. Finally, Chen et al (2013) have modelled the revamping of Hong Kong's currency board system in 2005 as a symmetric two-sided system with a narrow exchange rate band.…”