Should Hong Kong switch to Taylor rule?—Evidence from DSGE model

This paper studies the economy of Hong Kong through lens a small open DSGE model with currency board exchange rate commitment. It assumes flexible prices and banking system that provides credit to entrepreneurial household firms; money supply is fully backed by reserves under board. We estimate evaluate Indirect Inference over sample period 1994Q1-2018Q3; we find it matches data behaviour as represented VAR. examined economy’s volatility using bootstrapping innovations, both estimated standard alternative regime floating Taylor rule; found welfare higher in board, which substantially reduces output volatility.