Deepening and Fine-tuning Hong Kong's Linked Exchange Rate System: An Insightful Analysis.

This research thoroughly examines how Hong Kong can improve and reform its Linked Exchange Rate System (LERS), a fixed peg that ties the Hong Kong dollar (HKD) to the US dollar (USD) within a narrow band of HK$7.75 to HK$7.85. Since its establishment in 1983, the LERS has been crucial in maintaining the region's monetary stability and financial credibility. However, the changing macroeconomic environment marked by increasing financial instability, rising volatility in capital flows, and occasional external stress events raises important questions about how to protect the exchange rate link system. The study aims to enhance the system's effectiveness, resilience, and flexibility amidst evolving global monetary conditions. It considers both short-term corrective actions and long-term structural reforms, taking into account global monetary policy trends, exchange rate regime theories, and the views of key local and international financial stakeholders. The goal is to contribute to the discussion on optimal currency peg arrangements within the context of a rapidly globalizing economy.