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

Author/Editor:

Hong Liang

Publication Date:

June 1, 1999

Electronic Access:

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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.

Series:

Working Paper No. 99/79

Subject(s):

English

Publication Date:

June 1, 1999

ISBN/ISSN:

9781451850185/1018-5941

Stock No:

WPIEA0791999

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

17

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