G.F. 316
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12
25.
There is some doubt as to whether interest
rate differentials between the Hong Kong dollar and the
US dollar have been effective in bringing about offsetting
flows of funds into or out of the Hong Kong dollar.
This however has little to do with the linked exchange
rate system itself or with the special characteristics
of Hong Kong's monetary system. The yields of Hong Kong
dollar financial and other assets relative to those of
corresponding US dollar assets are an important consideration.
The general experience however is that substantial interest
rate differentials have to be sustained for a longish
period, in terms of months rather than days or weeks,
before they generate the offsetting flows. Much of course
depends on the severity of the original shock.
26.
The demand for credit in Hong Kong also does
to be very sensitive to changes in interest
rates. The Hong Kong dollar money supply has, nevertheless,
shown changes consistent with expectations since the
adoption of the linked exchange rate system. When there
was substantial inflow into the Hong Kong dollar, as
in the case of the second half of 1986 and the first
quarter of 1987, the Hong Kong dollar money supply increased
fairly rapidly, and vice versa when there was outflow.
It is likely, however, that some of the change in the
growth rates of the Hong Kong dollar money supply in
the past four years was a reflection of a switch in the
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