Volatility of fundamental variables under different exchange rate system--a simple test for Hong Kong

Abstract

This paper presents a comparison in the changes of Hong Kong macroeconomic fundamental variables before and after its currency was ‘pegged’ to the US dollar in October 1983. Using a simple method from Flood and Rose (1995) and Baxter and Stockman (1989), this paper compares the volatilities of all aggregate variables used by those investigators in so far as these data are available for Hong Kong. The results show, contrary to the dominating empirical literature for the G-7 countries, that the volatilities of more than half of the nominal and real variables under the float are significantly higher than those under the link.