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2. The Linked Exchange Rate System (LERS) has been implemented in Hong Kong since 17 October 1983. Through a rigorous, robust and transparent Currency Board
2. "The Linked Exchange Rate System (LERS) has been implemented in Hong Kong since 17 October 1983. Through a rigorous, robust and transparent Currency Board system, the LERS ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar." - Hong Kong Monetary Authority (HKMA). (a) We understand that this system removes away lots of exchange risk and reduce the cost of doing business. But what arguments would you make to convince the HKMA to pursue a floating exchange rate instead? (b) During the 1997 Asian financial crisis, speculators bet that the HKMA had to devaluate the Hong Kong dollar. The HKMA raised the interest rate and made a rare intervention by buying shares directly from the stock market. Could you use what we have learnt about Balance of Payments Crises to rationalize the reaction of HKMA
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