Do Hong Kong SAR and China Constitute An Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis

June 1, 1999

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Format: Chicago

Hong Liang. Do Hong Kong SAR and China Constitute An Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis, (USA: International Monetary Fund, 1999) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper explores the behavior of the long-run real exchange rate (RER) of Hong Kong SAR and China by testing the generalized-purchasing power parity hypothesis (G-PPP). The hypothesis argues that if the fundamental variables determining RERs are sufficiently integrated, as in a currency area, the RERs should share common trends. The findings of this study suggest (1) at present, Hong Kong SAR and China do not satisfy the conditions necessary for forming an optimal currency area by themselves; (2) when Japan and the United States are added to the group, common trends can be found; and (3) the long-run elasticity between the RERs of Hong Kong SAR and China is negative.

Subject: Currencies, Economic integration, Exchange rates, Foreign exchange, Monetary unions, Money, Purchasing power parity, Real exchange rates

Keywords: Asia and Pacific, China, China-United States, Currencies, Exchange rate series, Exchange rates, Generalized purchasing power hypothesis, Hong Kong SAR, Monetary unions, Optimal currency union, Purchasing power parity, Real exchange rate, Real exchange rates, Special administrative region, WP, Yuan depreciation, Yuan devaluation

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/079
Stock No:

WPIEA0791999
ISBN:

9781451850185
ISSN:

1018-5941

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