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The Linked Exchange Rate System was established in 1983. It is in essence a Currency Board system, which requires both the stock and the flow of the Monetary Base to be fully backed by foreign reserves. Any change in the size of the Monetary Base has to be fully matched by a corresponding change in the foreign reserves. In Hong Kong, the Monetary Base comprises the following components: Certificates of Indebtedness (as backing for banknotes) and government-issued notes and coins; the sum of balances of banks' clearing accounts (Aggregate Balance) maintained with the HKMA for the purpose of clearing and settling transactions between the banks themselves, and also between the banks and the HKMA; and the outstanding amount of Exchange Fund Bills and Notes.
Certificates of Indebtedness (as backing for banknotes) and government-issued notes and coins;
the sum of balances of banks' clearing accounts (Aggregate Balance) maintained with the HKMA for the purpose of clearing and settling transactions between the banks themselves, and also between the banks and the HKMA; and
the outstanding amount of Exchange Fund Bills and Notes.
It also functions as a clearinghouse for interbank payment and settlement.
The role of the Fed is totally incidental here. They might as well have mandated that the HKMA must have enough gold reserves (or barrels of oil) to back all the banks' liabilities. By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
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