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Wednesday, January 21, 2015

A Tale of Two Pegs

Paul Krugman on the independence of central banks from the concerns of "hard-money types":

A Tale of Two Pegs: I’m still in Hong Kong, and ... by the numbers Switzerland’s monetary situation pre-collapse and Hong Kong’s now look remarkably similar. ... So is the Hong Kong dollar at risk of a franc-like event?
No, it isn’t. There’s not a hint of pressure to drop the currency board. Why is Hong Kong different?
The answer, I’d argue, is that the institutional setup and history of Hong Kong plays very differently with hard-money ideologues than the Swiss peg did... Swiss currency intervention looked to the usual suspects like activist monetary policy, runaway expansion of the central bank’s balance sheet, “printing money” to debase the currency even if the goal was to keep it from getting stronger. Meanwhile, Hong Kong has a currency board, which is the next best thing to the gold standard, so maintaining the peg — through the very same mechanisms Switzerland was using! — became a demonstration of stern Victorian monetary virtue. Hence no chorus demanding that the peg be abandoned.
Remember, there was no forcing event in Switzerland; as far as the finances go, the SNB could have maintained the peg forever. It was the nagging from hard-money types that led to the debacle. Meanwhile, Hong Kong has managed to wrap the very same policy in libertarian clothes, and there’s no problem.

    Posted by on Wednesday, January 21, 2015 at 10:41 AM in Economics, International Finance | Permalink  Comments (16)


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