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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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
Pages:
17
Volume:
1999
DOI:
Issue:
079
Series:
Working Paper No. 1999/079
Stock No:
WPIEA0791999
ISBN:
9781451850185
ISSN:
1018-5941
