Although the Hong Kong arrangement, and in particular the status of our Monetary Authority, is unusual internationally and may possibly be unique when compared to the more typical set-up of a central bank established as a distinct corporate entity, the process of monetary policy may not in practice be greatly different from that in other jurisdictions – with the broad framework being set by the government and with the central bank executing the policy in a transparent and accountable fashion. However, we do not have such a precisely defined framework of autonomy for the central bank as exists in some other jurisdictions, which is sometimes regarded as a necessary formal safeguard to monetary stability. The distinction may be less important under our firmly rule-based currency board system than it might be in other circumstances. Legal parameters Let's turn now to the "what" question. Although, as noted already, the Basic Law clearly states that the Hong Kong government shall determine its own monetary policy, it also sets some very important parameters within which that freedom can be exercised. Thus:"The Hong Kong dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate." (Article 111) "No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region. The Hong Kong dollar shall be freely convertible. …….The Government of the Hong Kong Special Administrative Region shall safeguard the free flow of capital within, into and out of the Region."
(Article 112) "The Exchange Fund of the Hong Kong Special Administrative Region shall be managed and controlled by the government of the Region, primarily for regulating the value of the Hong Kong dollar." (Article 113) "The Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product." (Article 107) These stipulations confirm the continuance of the Hong Kong dollar as an independent currency; they confirm that the Exchange Fund is available to regulate the exchange rate; they rule out the use of exchange controls; and they provide some comfort that deficit fiscal financing should not attain a scale that would pose a serious threat to monetary stability. Choice of regime But within these parameters the exact monetary arrangements are not prescribed. We have chosen to operate a currency board with a fixed rate against the US dollar. I have recently written and spoken at  2  BIS Review 31/2002  2  some length on the rationale behind this choice and do not intend to repeat all of that today. But let me just reiterate one of my principal contentions – namely that monetary policy, which includes exchange rate policy, cannot determine an economy's competitiveness outside the relatively short term.