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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 (JEL F33, G15).
Key words: currency board system, currency substitution, pegged exchange rates, seigniorage.
I. Introduction
Following the speculative attack on the Hong Kong dollar (HK dollar) in September of 1983, the Hong Kong government pegged the HK dollar to the U.S. dollar at 7.80/1.00, which has remained the same since then.' This peg is a currency-based peg in that the exchange of HK dollar currency for U.S. dollar currency takes place only between banks and the government's Exchange Fund. Because of processing costs, the banks charge a commission fee of 1 percent on each transaction initiated by non-bank customers. Therefore, the exchange rate for bank deposit money varies by 1 percent above and below the above pegged rate. The peg has made the HK dollar widely acceptable in foreign trade. However, the HK dollar has not been as widely acceptable in international trade as the U.S. dollar.
Macau pegs the pataca to the HK dollar at 1.03/1.00, with an effective 1 percent range above and below. In 1993, the government of Macau passed an ordinance requiring local businesses to list the prices of goods in patacas, probably because of fear that the HK dollar might displace the pataca in Macau. Nevertheless, the government does not discourage the circulation of HK dollars and other foreign currency in Macau. Bank automatic teller machines (ATMs) in Macau dispense bank notes in either of the two currencies.2
Having one currency pegged to another currency, which in turn is pegged to the U.S. dollar, is unique in the annals of international financial arrangements. Moreover, the fact that the HK dollar is widely used in local trade in Hong Kong raises a question of whether a currency with less intrinsic value (HK dollar) is driving out a currency with the higher intrinsic value (US...