Exchange Market Pressure and the Credibility of Macau's Currency Board
In this study, we assess the credibility of the currency board arrangement (CBA) of the Macau Special Administrative Region by studying the relationship between exchange market pressure (EMP) and the anchors of a rule-based CBA, namely, interest rate arbitrage, exchange rate arbitrage and economic discipline. A pure CBA signals its credibility by allowing the first two anchors to function automatically and by pursuing sound fiscal policies. The analysis’ results suggest that Macau’s CBA has been characterised by a state of low volatility since late 1992, with the brief exception of the East Asian financial crisis period. The paper’s main finding is that fiscal fundamentals seem to have a more pronounced role in reducing EMP’s variability during periods of low volatility whilst interest rate arbitrage is more important in periods of high volatility. We conclude that Macau’s CBA is credible at present as reflected in the low frequency of observed EMP, in the narrowing of Macau’s interest rate differential vis-a-vis U.S. interest rates and in Macau’s substantial fiscal reserves.
Pegged Exchange Rate Systems in Macau and Hong Kong
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.
The Determinants of the Spread in the Black Market for Dollars in Costa Rica
This note presents results from a time series study of a version of the theory of the bid-ask spread in the context of the Costa Rican black market for dollars using monthly averages of daily data over the period January 1988 to September 1991. The theory is tested by regressing the monthly average of daily spreads on the interest rate and the monthly variance of the premium. The results confirm the role of interest costs and inside information risk and suggest that in the face of an increased flow of buy orders-for dollars without a matching increase in sales, dealers respond by raising the spread. [F31]