Pegged Exchange Rate Systems in Macau and Hong Kong

Abstract

The author would like to thank Ms. Winnie Kuan for valuable assistance in the preparation of the article and the referees and managing editor of the MFJ for helpful comments. 1. Before the peg, there existed a government ordinance in Hong Kong called the Prohibition of Circulation of Foreign Currency to help strengthen the circulation of the HK dollar. The ordinance was abolished a few years after the establishment of the pegged system. Macau pegs its currency, the pataca, to the Hong Kong dollar, which in turn is pegged to the U.S. dollar. This type of pegging order is unique in the annals of international financial arrangements. This article analyzes the structure of the pegged exchange rate systems in Macau and Hong Kong and discusses the financial and economic implications of these systems for the two territories (JEL F33, G15).