Exchange Rate Regimes and Inflation Transmission: Evidence from Hong Kong and Thailand

Abstract

This study aims to (1) examine the long-run equilibrium relationship between U.S. inflation and Hong Kong inflation, (2) examine the long-run equilibrium relationship between U.S. inflation and Thai inflation, and (3) investigate the causal transmission of inflation from the United States to Hong Kong and Thailand. Monthly time-series data from January 2018 to December 2022 are employed, using the consumer price index, exchange rate, money supply, and international reserves as the key variables. The analytical methods consist of the Johansen Cointegration Test, the Vector Error Correction Model (VECM), and the Granger Causality Test. The empirical results show that (1) U.S. and Hong Kong inflation share a long-run equilibrium relationship, consistent with Hong Kong’s fixed exchange-rate regime, which limits monetary policy autonomy; (2) U.S. and Thai inflation also exhibit a long-run equilibrium relationship, indicating persistent price linkages despite Thailand’s managed-float regime; and (3) the transmission of U.S. inflation to Hong Kong operates through money supply and international reserves, whereas the transmission to Thailand occurs through domestic inflation and the exchange rate. Overall, the findings confirm that the exchange-rate regime plays a crucial role in shaping both the magnitude and channels of international inflation transmission, with fixed-rate economies being more exposed to global inflation shocks than economies with more flexible arrangements.