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Based on a small, open-economy IS-LM prototype model, this paper examines the sources of macroeconomic instabilities in Hong Kong and Singapore operating under two similar cu訂ency board arrangements (CBAs). The empirical findings suggest that in general both extemal and intemal factors contribute to the macroeconomic volatilities observed in the two economies. Interestingly, whilst in Hong Kong interest rate is the single most important factor accounting for the variation in real GDP, price level and money supply, in most cases in Singapore the volatilities of these three macro variables cannot be attributed to a significant single facto r. Interest rate in both Hong Kong and Singapore moves in tandem with that of the US in the long run. In the short run, the US interest rate has both direct and indirect impacts on the two economies. Due to the high openness, international prices also affect domestic demands and prices in Hong Kong and Singapore. In addition, macroeconomic

volatilities in Hong Kong and Singapore are also attributable to the shocks in their domestic demand, though the relative magnitude of impact differs. Finally, there is evidence of a trade-off between exchange rate and interest rate targeting for the stability of money supply in Singapore. Our findings provide a useful framework for future research on the financial and monetary transmission mechanisms in the twin economies of Hong Kong and Singapore.


CAPS Working Paper Series No. 148 (Mar 04)

Recommended Citation

Ma, Y., Kueh, Y. Y., & Ng, R. C. W. (2004). Exchange rate regimes and the twin economies of Hong Kong and Singapore (CAPS Working Paper Series No.148). Retrieved from Lingnan University website: