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(From South China Morning Post)
Hong Kong's linked exchange rate mechanism - its peg to the US dollar - has come in for regular bashing as a cause of deflation over the past 50 months.
When Hong Kong's regional neighbours devalued their currencies during the Asian financial crisis, Hong Kong - with its linked exchange rate system - could not adjust the external price for its dollar. Therefore, domestic prices adjusted instead. This adjustment process has been taking place and has caused considerable pain as a result.
It is impractical now to argue whether Hong Kong should have devalued in 1997-98 to avoid deflation. The questions today are whether the adjustment process has reached or is close to equilibrium; and whether de-linking now is the best medicine to apply to revive …