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DRAFT
The Linked Exchange Rate System
Introduction
Annex
II
The linked exchange rate system was introduced
on 17 October 1983 after a period when the Hong Kong
dollar had been depreciating sharply. It has successfully
brought stability to the exchange rate. This paper first
gives a brief, theoretical description of how the linked
exchange rate system is supposed to work and then describes
in greater detail how in practice it has worked, in the
light of experience in the past four years.
Discrepancies
and their underlying causes are in the process identified
and discussed. The views contained in this paper concerning
the operation of the linked exchange rate system are
highly sensitive and have never been made public. The
release of any information in this paper could cause
serious market disruption.
History of Hong Kong's currency
2.
It will be useful to preface a discussion of
the linked exchange rate system by a brief history of
Hong Kong's currency. Prior to 6 December 1935 silver
was the basis of the Hong Kong currency. After that
date the Hong Kong dollar was linked to the pound sterling.
That link was retained for 37 years to 1972.
that period sterling was devalued twice. The first
During
/devaluation
G.F. 316
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