03-NOV-1993 09:43
HKMA
6
+ 852 878 8130
P.07
Kong and the pure gold or silver standard. In the latter system, bank notes or deposits could be converted at a fixed rate into gold or another currency by any party. Under the linked exchange rate system, there was a wedge between HKD bank notes and HKD deposits for banks; and between HKD bank notes and USD for non-banks. He proposed that the inconvertibility problem could be solved by permitting the public to exchange HKD bank notes for USD on almost the same terms as banks. But he recognised that there would be practical difficulties. Alternative solutions would include: (1) allowing greater deviation in the free market from the fixed level of 7.80, or (2) encouraging banks to treat HKD and USD assets and liabilities as interchangeable.
20.
Mr. Greenwood emphasized that the linked rate system had successfully reduced monetary instability in Hong Kong. There was much less volatility in the growth of broad money supply. He commented that while Hong Kong's consumer inflation was higher than US, Hong Kong remained competitive in exports, given the faster increase in productivity.
21.
Dr. Y. C. Jao, Reader in Economics at the University of Hong Kong, pointed out that established theory suggest that the monetary authorities could not control simultaneously more than one of the three target variables: money supply, interest rate and exchange rate. He agreed that given Hong Kong's unique political and economic circumstances, exchange rate stability should be the primary goal of monetary management. The Mundell-Fleming model with the perfect capital mobility assumption, which applied to Hong Kong, suggested that monetary policy under a fixed exchange rate regime was ineffective, while fiscal policy was highly effective. Consequently, Hong Kong should adopt a tight fiscal policy to curb inflation, to be supplemented by credit policy, labour policy and income policy.
22.
Dr. Richard Wong, Director of the Hong Kong Centre for Economic Research at the University of Hong Kong, discussed policies other that fiscal and monetary policies that may affect monetary management. He considered that the process of resource re-deployment in Hong Kong could be facilitated by a greater reliance on market forces. Artificial impediments to the proper operation of market forces should be removed or reduced. These included, for example, (1) avoiding policies that reduced labour market mobility and; (2) tackling asset price inflation especially in the housing market by increasing the effective supply of housing or privatizing the existing public housing stock.