Why did Hong Kong choose to revive its currency board during the economic crisis of the 1980s?

Why did Hong Kong revive its currency board?

Over the past two years the discussions fostered by UPIER have given rise to many sub-projects. This October I spent a week in Oxford, working with Catherine Schenk, in order to develop one of them. Having found that we shared an interest in financial crises and Asian economies we had decided to examine the Hong Kong   economic crisis of the early 1980s, drawing particular attention to the way the crisis was resolved through the restoration of its currency board. It is a topic that has yet to be analysed in depth by economic historians and it seemed timely to do so, since choosing the right exchange rate regime for emerging economies remains a live issue today.

Around the turn of the millennium, it became common to advocate for the implementation of currency boards in emerging economies as a way for them to promote the credibility of their currency and monetary policy. This was not because currency boards had always proved to be the most judicious choice in the past but rather because it was a straightforward policy option for emerging markets.

Past crises are frequently referred to by policy-makers to frame, or promote, new financial sector policies and regulations.  One of our aims in the UPIER project is to deepen our knowledge of past crises, and the way the manner in which they were resolved, so as to improve our understanding of them.  Following a series of financial crises, the case for flexible exchange rates has been strong in recent years, but the tide has started to turn and recently economists have begun to reappraise this position. The Mundell-Fleming trilemma is being invoked with growing frequency to assess the permutations of monetary policy in the global economic environment. The trilemma holds that a country cannot simultaneously control its exchange rate, pursue an independent monetary policy and have open capital flows. What are the choices at stake and how does one decide what to prioritise when it comes to the exchange rate regime, monetary policy independence and capital flows in a globalised world? What has worked in the past, and why? The Hong Kong case helps us to review the policy options available at the time. In so doing we hope to show why a small, open economy chose to restore its currency board. 

In this project we are relying sources from several archives, one of them the National Archives at Kew. It was my first visit there and it was a pleasant surprise. The facilities are open and welcoming, the service fast and friendly and it is incredibly user-friendly.  As a foreigner, I was amazed at how easy it is to get access and that there was no need to provide an elaborate justification in order to see certain documents.  These documents, along with other sources, will provide us with plenty of material to work with. We are aiming to present our findings at the UPIER conference in May 2019 - an opportunity for me to return to Oxford.

Åsa Malmström Rognes

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