Competitiveness is determined by the intrinsic efficiency of the economy, which is in turn the result of investment, productivity, structural evolution, and so on; these may in turn be amenable to influence by government policy in various fields, but the role of monetary policy is to provide a stable monetary environment within which those longer-term forces can operate most propitiously, and not itself to attempt short-term fine-tuning. There is one further aspect of this debate which I should like to address, since it seems to be the focus of increasing attention. It is the issue of what should or should not be done with the Hong Kong dollar, were the renminbi to move more flexibly against the US dollar, and, more particularly, whether we should consider pegging the Hong Kong dollar to the renminbi. Adjustment of competitiveness Prices in Hong Kong are observed to be flexible in both directions in response to market forces. One of these forces is the influence of competing prices from the Mainland; our research indicates that there is a gradual process of convergence at work (which includes rises in prices across the border as well as falls in Hong Kong), although this may be weaker than some observers claim and certainly 3 does not mean that prices will or should eventually equalise completely. Moreover, prices of tradables in Hong Kong are found to be particularly adept at adjusting to movements in the effective exchange rate.
Three factors of uncertainty come into the picture: -  first, there is by essence a high degree of uncertainty surrounding the assessment of misalignments, related to their equilibrium prices and the channels of transmission to the real economy;  -  second, central banks have to keep in mind the balance of risks facing the economy: a monetary policy action that would reduce the risk of a large loss in the future might be very costly for the economy in the short run;  -  third, the effects of monetary policy decisions on asset prices are very uncertain. •  The announcement of a systematic reaction could therefore lead to moral hazard and undermine the central bank’s anti-inflationist credibility, which is its most precious asset. Moreover, the single interest rate policy cannot be geared simultaneously towards two potentially conflicting objectives. c.  Be aggressive or experiment  There may be two cases where gradualism is not the systematic guideline. •  Worst-case outcomes may best be prevented by following policy rules that are rather aggressive in responding to inflation deviations from target. •  A more aggressive policy rule may generate more information, which would improve the learning of the central bank and thereby future policy performance. But the learning process might be costly since it could generate increased volatility. 2. Some approaches to address uncertainty  a. Rely on monetary policy rules  •  Simple monetary policy rules (like the Taylor rule) may perform well in many different models.