Study On Suitability Of Hong Kong’s Linked Exchange Rate System

Argentina called off the linked exchange rate regime in2001, and began to implement the feree-floating exchange rate regime, the academia had aroused the suspicion of the linked exchange rate regime. After2008, the global economy has faced the attack of subprime crisis, at this circumstance, we should pay more attention on the suitability of HK’s linked exchange rate regime. This article based on the traditional theory of the choice of exchange rate regime, analyse the suitability of the linked exchange rate regime and give suggestion on improving HK’s exchange rate regime, it is not only good for our comprehensive national power, but also good for our homeland security.This article analyse the suitability of the linked exchange rate regime combined with HK’s real economic situation and has three aspects of research meanings:Firstly, after the returning of Hong Kong in1997, the economic contact between HK and the mainland of China has become more closer than before, Hong Kong has become an importand part of our integral economy, study on HK’s economy is not only good for our country’s whole social and economic stable development, but also good for the international development of our economy because Hong Kong is an international economic center; Secondly, this article refers to the related domestic and abroad research, analyses the suitability of Hong Kong’s linked exchange rate regime based on the traditional theory of the choice of exchange rate regime, and analyses the suitability of Hong Kong’s linked exchange rate regime in both empirical and theoretical way, combined with the macroeconomic situation in Hong Kong, which can expand the theoretical framework of the choice of exchange rate regime; Last, this article is good for the optimization and development of HK’s exchange rate regime. Faced with the financial turmoil caused by subprime crisis, Hong Kong should continue to implement the linked exchange rate regime or not, how to improve and evaluate the linked exchange rate regime should be paid more attention among domestic and abroad researchers, although most of the exist articles analysed in theoretical ways and mainly discussed the advantages and disadvantages of the linked exchange rate regime, this article refers to the impirical model of the choice of exchange rate regime, analyse the linked exchange rate regime, combines the theoretical with the practical ways.The basic idea of this paper are:Firstly, briefly discuss the theoretical basis combined with the actual situation of Hong Kong’s exchange rate regime, including the "The Impossible Trinity" principles and Mundell-Fleming Model’s applicability in Hong Kong. Then discuss the operation of the linked exchange rate system in Hong Kong in a more detailed way, including the background and necessity of HK’s linked exchange rate system, and the operating mechanism as well as the effects of exchange rate system in Hong Kong. Then refer to the relevant research literature and select the appropriate variables as well as an appropriate econometric model to analyse the problems and reasons in an empirical way. Finally, give suggestions on improving HK’s linked exchange rate system policy combined with the results of this research.According to the results of theoretical and empirical analysis of this paper, I think HK’s linked exchange rate system is built under close consideration and integration of internal and external economic conditions in Hong Kong, after the establishment of the linked exchange rate system since1983, it has made great contribution to economic stability and development of Hong Kong. But with the departure from Hong Kong and the U.S. economy, the level of exchange rate, the money supply and the price level have gradually uncoordinated developed, and appeared unidirectional causality in long-term, linked exchange rate system gradually exposed its shortcomings, and the difficulty of macro-control monetary authorities increases.The endogenous causes of the appearance of the drawbacks of HK’s linked exchange rate system is its native defects, such as lack of independence of monetary policy and so on; The exdogenous reason is the departure Hong Kong and the U.S.’s economic cycle, Hong Kong and the United States economic and trade ties have been gradually replaced by Hong Kong’s increasingly close economic ties with the Mainland of China.Taking into account of the cost and price of giving up the linked exchange rate system, the linked exchange rate system should not be changed largely at this time, in case of the huge impact to domestic and abroad economy. Based on empirical findings, this article gives suggestions from the aspect of pegged to RMB and promote the balance of inside and outside price, makes positive contribution to Hong Kong’s economic development and social stability.