Should Hong Kong switch to Taylor rule?—Evidence from DSGE model

Zhao, Zhiqi, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947 and Minford, Patrick ORCID: https://orcid.org/0000-0003-2499-935X 2022. Should Hong Kong switch to Taylor rule?—Evidence from DSGE model. Applied Economics 54 (50) , pp. 5851-5872. 10.1080/00036846.2022.2053655

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Abstract

This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour as represented by a VAR. We examined the economy’s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Routledge
ISSN:	0003-6846
Date of First Compliant Deposit:	8 March 2022
Date of Acceptance:	7 March 2022
Last Modified:	24 Nov 2024 13:30
URI:	https://orca.cardiff.ac.uk/id/eprint/148112

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