A Model of Hong Kongs Money Market

1
A Model of Hong Kongs Money Market

• Liquidity provision is important under HKs
  currency board arrangements gt need to minimise
  interest rate and exchange rate volatility
• Little scope for discretionary actions to
  influence liquidity
• Thus need to create robust institutional
  structures intervention points and amounts
  discount window functioning etc.

2
Model Characteristics

• Daily frequency rational expectations
• Key relationships
• 1. investor demand for HK assets
• 2. banks demand for liquidity
• 3. discount window borrowing
• 4. HKMA FX market activity
• Determine
• 1. money market interest rates
• 2. exchange rate
• 3. banks borrowed and nonborrowed clearing
  balances

3
Uses of Model

• Pedagogical deterministic simulations to
  understand how currency board arrangements work
• System design stochastic simulations to
  evaluate tradeoffs
• Stress testing event studies to simulate how
  system would work in extreme cases

4
Example Volatility Tradeoff