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Hong Kong's free-issue monetary regime (1974-1983): The price level indeterminacy puzzle.

Record Type:	Electronic resources : Monograph/item
Title/Author:	Hong Kong's free-issue monetary regime (1974-1983): The price level indeterminacy puzzle./
Author:	Shah, Parth J.
Published:	Ann Arbor : ProQuest Dissertations & Theses, : 1990,
Description:	151 p.
Notes:	Source: Dissertations Abstracts International, Volume: 53-05, Section: A.
Contained By:	Dissertations Abstracts International53-05A.
Subject:	Economic theory. -
Online resource:	http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=9201455
ISBN:	9798641807201

Hong Kong's free-issue monetary regime (1974-1983): The price level indeterminacy puzzle.
Shah, Parth J.

Hong Kong's free-issue monetary regime (1974-1983): The price level indeterminacy puzzle. - Ann Arbor : ProQuest Dissertations & Theses, 1990 - 151 p.

Source: Dissertations Abstracts International, Volume: 53-05, Section: A.

Thesis (Ph.D.)--Auburn University, 1990.

This item must not be sold to any third party vendors.

This study involves a unique monetary regime of Hong Kong, the free-issue regime (1972-1983), where apparently all nominal magnitudes--price level, money supply, and exchange rate--were governed by market forces. The system did not seem to have any nominal anchor. Theoretically its price level was indeterminate, engendering what is called an indeterminacy puzzle. Theories underlying the concept of indeterminacy are explored and a two-prong empirical investigation is undertaken to resolve the puzzle. One approach focuses on organization and interrelations among economic institutions of the free-issue regime; the other approach concentrates on econometric appraisal of the data. Hong Kong, true to its reputation as a laissez-faire economy, does not have a central bank. Its currency is issued by private banks. Through its modern history until 1974, Hong Kong was on a sterling-exchange standard, and the banknotes of the private banks were convertible into pounds sterling. The money supply, though in private hands, was constrained by the availability of pounds, in other words, by overall balance of payments. This constraint was removed in November 1974 when Hong Kong adopted floating exchange rates following Britain's floating of its pound. The convertibility constraint was restored in October 1983 when Hong Kong linked its dollar to the US dollar. The free-issue regime of 1974-1983 raises several riddles for money-macro and banking theories. What restricted the private banks from rapid expansion of the money supply? In the apparent absence of Schumpeter's "critical figure" and Patinkin's "money illusion," who provided the nominal anchor--price-level determinacy? It is shown that an interest-rate cartel enforced by the Hong Kong Association of Banks regulated the growth of money supply and rendered determinacy to the price level. A rational expectations model supports the thesis of determinate price level under a cartelized banking system. However, the critical figure defined by the cartel--by fixing loan and deposit rates--was rather loose and over time the cartel's control was weakening because of financial innovations to elude the interest rate restrictions. The study illustrates that a broader approach to empirical inquiry, that of institutional and econometric analysis, is not only insightful but also convincing.

ISBN: 9798641807201Subjects--Topical Terms:

1556984
Economic theory.

Hong Kong's free-issue monetary regime (1974-1983): The price level indeterminacy puzzle.
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506 $a This item must not be sold to any third party vendors.
506 $a This item must not be added to any third party search indexes.
520 $a This study involves a unique monetary regime of Hong Kong, the free-issue regime (1972-1983), where apparently all nominal magnitudes--price level, money supply, and exchange rate--were governed by market forces. The system did not seem to have any nominal anchor. Theoretically its price level was indeterminate, engendering what is called an indeterminacy puzzle. Theories underlying the concept of indeterminacy are explored and a two-prong empirical investigation is undertaken to resolve the puzzle. One approach focuses on organization and interrelations among economic institutions of the free-issue regime; the other approach concentrates on econometric appraisal of the data. Hong Kong, true to its reputation as a laissez-faire economy, does not have a central bank. Its currency is issued by private banks. Through its modern history until 1974, Hong Kong was on a sterling-exchange standard, and the banknotes of the private banks were convertible into pounds sterling. The money supply, though in private hands, was constrained by the availability of pounds, in other words, by overall balance of payments. This constraint was removed in November 1974 when Hong Kong adopted floating exchange rates following Britain's floating of its pound. The convertibility constraint was restored in October 1983 when Hong Kong linked its dollar to the US dollar. The free-issue regime of 1974-1983 raises several riddles for money-macro and banking theories. What restricted the private banks from rapid expansion of the money supply? In the apparent absence of Schumpeter's "critical figure" and Patinkin's "money illusion," who provided the nominal anchor--price-level determinacy? It is shown that an interest-rate cartel enforced by the Hong Kong Association of Banks regulated the growth of money supply and rendered determinacy to the price level. A rational expectations model supports the thesis of determinate price level under a cartelized banking system. However, the critical figure defined by the cartel--by fixing loan and deposit rates--was rather loose and over time the cartel's control was weakening because of financial innovations to elude the interest rate restrictions. The study illustrates that a broader approach to empirical inquiry, that of institutional and econometric analysis, is not only insightful but also convincing.
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