| Abstract | Economic tests by the Hong Kong Monetary Authority show that the demand for Hong Kong dollar appears to be sensitive to income, interest rates, inflation, business activity and sentiment in Hong Kong. Like other economies, currency holdings declined relative to gross domestic products for many years, but in Hong Kong the ratio turned upward since 1984. The authors attribute this to currency circulating outside Hong Kong, mainly in China, perhaps amounting to around 19 billion Hong Kong dollars or a quarter of total currency issued. Unlike currency, demand for Hong Kong dollar time deposites, and so Hong Kong dollar M3, rise more than proportionately with income. Under current economic conditions, the velocity of broad money is expected to fall by around 2% a year. |
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