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

17 Pages Posted: 13 Feb 2006

See all articles by Hong Liang

Hong Liang

International Monetary Fund (IMF)

Date Written: June 1999

Abstract

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.

Keywords: Real exchange rate, generalized purchasing power hypothesis, optimal currency union

JEL Classification: F33, F31, F41

Suggested Citation

Liang, Hong, Do Hong Kong Sar and China Constitute an Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis (June 1999). IMF Working Paper No. 99/79, Available at SSRN: https://ssrn.com/abstract=880606

Hong Liang (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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