Over time Hong Kong has adapted to some of the peg’s constraints. Its exchange rate may be rigid, but its other prices and wages are remarkably flexible. During the financial crisis, even senior civil servants took a pay cut. This flexibility allows the economy to adjust quickly to cyclical ups and downs without the help of an independent monetary policy.
Prices, particularly for property, do sometimes take on a life of their own. But a more flexible exchange rate is not enough by itself to prevent asset-price booms: Singapore’s house prices have also soared despite its strengthening currency. And in some cases the currency itself can be the asset that takes off. The Swiss franc, for example, strengthened dramatically during the euro crisis, prompting its central bank to intervene. As nearby countries like India and Indonesia fret about capital outflows and plunging currencies, the stability offered by Hong Kong’s peg looks as good on its 30th birthday as it ever has.
Can we learn anything from these examples? I’d say nothing definitive, but they do add a couple data points to several interesting questions:
1. Are the New Keynesians right that wage flexibility makes depressions worse?
2. Are the Austrians right that easy money leads to asset prices bubbles.
My view before reading the article was no and no. After reading the article I hold the same view, but with an epsilon more confidence.
The charts paint a picture that both NK´s and Austrians, for different reasons, would find ‘disturbing’!
As for the ‘high inflation’: Last year HK had 3.8%, this year it´s up to 4.2% (to September). Singapore had 4.7% inflation last year and is down to less than 2% this year.