Bulletin Spring‧Summer 1995

George W. L. H ui f i r st joined C U HK in late 1983as an assistant lecturerin theM BA D i v i s i o n . Two years later hereturned toN o r t h w e s t e r n U n i v e r s i t y ( I l l i n o i s , U S A) to c o m p l e t e his d o c t o r a l d i s s e r t a t i o ni n economics. Dr. H ui r e j o i n e d C U HK i n 1989 aslecturer in f i n a n c e . He has since beenw o r k i n g upon local economic problems and general a n a l y t i c a l models motivated by them. the Scottish philosopher David Hume. In theory, it should ensure that Hong Kong does not persistently accumulate or lose foreign currency reserves beyond desirable levels. The reduction of reserves is especially worrying, because it may be the underlying cause of a currency crisis. The Real Multi-currency World wi th Capital Flows There is no successful theoretical model for the real multi-currency world wi th capital flows. These are two of the essential features of today's world, and indeed, of Hong Kong's small, open economy. The theoretical model above only focusses on two currencies fixed in a constant ratio to each other. In reality, while the HK dollar is pegged to the US dollar, it floats against all important currencies. Secondly, there is no guarantee that the above mechanismwill work when capital account transactions (such as stock and real estate) are as important as current account transactions. For Hong Kong, much evidence suggests that transactions in assets (capital account) are as significant as normal trade (current account). Besides the above two theoretical considerations, the very different rates of inflation between Hong Kong and its key trading partners also suggest that the mechanismmay not be working as postulated. A Comprehensive Project Dr. George Hui, lecturer at the University's Department of Finance, has launched a research project that focusses upon inflation in Hong Kong and its exchange rate policy. Entitled 'Exchange Rate Policy of a Small Open Economy in a Multicurrency World with Capital Flows', the project won a competitive grant of HK$266,000 from the Research Grants Council in 1993. Dr. Hui's project covers both the theoretical and practical aspects. For the former, the two essential features mentioned earlier are being built into the specie-flow models to see if the major predictions of the model are still valid. The latter examines whether or not the modified mechanism still applies to Hong Kong. With fixed exchange rate systems of the Currency Board variety being revived in countries like Russia, Bulgaria, Estonia and Argentina, such aproject will generate interest beyond its immediate environment. Research 30