How Exchange Rate and Interest Rate Affect Hong Kong Market Essay

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Pages: 13

In 1983, Hong Kong implemented Fixed-linkage System to US currency because of the reason that Hong Kong currency was very unstable. This Fixed-linkage System is a fixed exchange rate system that fixes the exchange rate of Hong Kong Dollar and United State Dollar to a ratio of 7.8: 1 Hong Kong Monetary Authority does not need to stable exchange market by controlling the supply and demand of HKD. It can be stabilized by Fixed-linkage System.
In the past 15 years, Hong Kong interest rates and exchange rates fluctuated in the same trend of the US interest rate and exchange rate. The graphs below show an example of interest rate and exchange rate respectively:
We can see that their trends and fluctuations are normally the same.
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As a result, they will consume less |
| |and save more. This in turn lowers the GDP and hence the|
| |economy. |
| |In reality, the data does not show a similar effect |
| |advocated by the theory, the reason is that this effect |
| |is quite weak, the consumption is mailny determined by |
| |other fators. |

Graph 5

The unemployment rate indicates the economic conditions of the region. Usually, lowering the interest rate casues the a increasing of investment incentives and the amount of net exports. This produce more job opportunities and the combined effect gives rise to the region’s economy, increasing the ease of getting a job. So we expect that lowering interest rate helps reduce the unployment rate.

The real model shows that the unemployment rate hows a negative relation after year 99, which was not as the same as the theory predicted. However, it held before the year, i.e. lowering interest