Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore

Recent decades have witnessed a steady decline in the real interest rates associated with US Treasury securities, especially after 2008 US subprime crisis. Since the spillover effect of developed or large economies on the small open economies is largely through trade and financial linkages, any shoc...

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Main Authors: Yang, Chuyi, Zhang, Tong, Zhu, Shitong
Other Authors: Chia Wai Mun
Format: Final Year Project
Language:English
Published: 2015
Subjects:
Online Access:http://hdl.handle.net/10356/62730
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-627302019-12-10T12:42:26Z Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore Yang, Chuyi Zhang, Tong Zhu, Shitong Chia Wai Mun School of Humanities and Social Sciences DRNTU::Social sciences::Economic theory::Macroeconomics DRNTU::Social sciences::Economic development::Singapore DRNTU::Social sciences::Economic development::China DRNTU::Business::Finance::Interest rates Recent decades have witnessed a steady decline in the real interest rates associated with US Treasury securities, especially after 2008 US subprime crisis. Since the spillover effect of developed or large economies on the small open economies is largely through trade and financial linkages, any shocks from other countries could have a significant effect on the domestic economy. This study aims to address the question of whether exchange rate regimes play a role in influencing the macroeconomic performances of comparable small open economies in response to foreign real interest rate shocks. Particularly, experiences from Hong Kong and Singapore are studied from both theoretical and empirical approaches because they are comparable economies with different exchange rate regimes from the period of 1984 to 2010. Theoretical framework was derived based on Mundell-Fleming Model and AD-AS Model, followed by applying Vector Error Correction Model (VECM) to estimate and interpret empirical results in Hong Kong and Singapore. Unit root test and Cointegration test were conducted to select the model before the identification of reduced VECM and structural form. Impulse Response Functions (IRF) were computed and Forecast Error Variance Decompositions (FEVD) were provided as supplementary evidence. This study demonstrates that Hong Kong and Singapore will have different macroeconomic performances under foreign real interest rate shocks, since exchange rate regimes do play a role in the transmission mechanism of foreign real exchange rate shocks. Therefore, our study provides implications for small open economies regarding their policy choices of exchange rate regimes. Moreover, our study could also help explain the increasing popularity of floating exchange rate regimes in the recent decades. Bachelor of Arts 2015-04-28T05:39:36Z 2015-04-28T05:39:36Z 2015 2015 Final Year Project (FYP) http://hdl.handle.net/10356/62730 en Nanyang Technological University 46 p. application/pdf
institution Nanyang Technological University
building NTU Library
country Singapore
collection DR-NTU
language English
topic DRNTU::Social sciences::Economic theory::Macroeconomics
DRNTU::Social sciences::Economic development::Singapore
DRNTU::Social sciences::Economic development::China
DRNTU::Business::Finance::Interest rates
spellingShingle DRNTU::Social sciences::Economic theory::Macroeconomics
DRNTU::Social sciences::Economic development::Singapore
DRNTU::Social sciences::Economic development::China
DRNTU::Business::Finance::Interest rates
Yang, Chuyi
Zhang, Tong
Zhu, Shitong
Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
description Recent decades have witnessed a steady decline in the real interest rates associated with US Treasury securities, especially after 2008 US subprime crisis. Since the spillover effect of developed or large economies on the small open economies is largely through trade and financial linkages, any shocks from other countries could have a significant effect on the domestic economy. This study aims to address the question of whether exchange rate regimes play a role in influencing the macroeconomic performances of comparable small open economies in response to foreign real interest rate shocks. Particularly, experiences from Hong Kong and Singapore are studied from both theoretical and empirical approaches because they are comparable economies with different exchange rate regimes from the period of 1984 to 2010. Theoretical framework was derived based on Mundell-Fleming Model and AD-AS Model, followed by applying Vector Error Correction Model (VECM) to estimate and interpret empirical results in Hong Kong and Singapore. Unit root test and Cointegration test were conducted to select the model before the identification of reduced VECM and structural form. Impulse Response Functions (IRF) were computed and Forecast Error Variance Decompositions (FEVD) were provided as supplementary evidence. This study demonstrates that Hong Kong and Singapore will have different macroeconomic performances under foreign real interest rate shocks, since exchange rate regimes do play a role in the transmission mechanism of foreign real exchange rate shocks. Therefore, our study provides implications for small open economies regarding their policy choices of exchange rate regimes. Moreover, our study could also help explain the increasing popularity of floating exchange rate regimes in the recent decades.
author2 Chia Wai Mun
author_facet Chia Wai Mun
Yang, Chuyi
Zhang, Tong
Zhu, Shitong
format Final Year Project
author Yang, Chuyi
Zhang, Tong
Zhu, Shitong
author_sort Yang, Chuyi
title Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
title_short Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
title_full Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
title_fullStr Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
title_full_unstemmed Foreign interest rate shocks and exchange rate regimes of small open economies : experience from Hong Kong and Singapore
title_sort foreign interest rate shocks and exchange rate regimes of small open economies : experience from hong kong and singapore
publishDate 2015
url http://hdl.handle.net/10356/62730
_version_ 1681038072719867904