Currency board still good option, says HK peg's architect

More than 30 years after playing a key role in the creation of Hong Kong's dollar (Exchange: HKDUSD=) peg, John Greenwood reckons a currency board is still a good option for small, open economies.

Greenwood, who is Invesco's chief economist, told CNBC that Hong Kong's peg was at the head of a currency board revival over the past 20 to 30 years, most of which served the adopting countries well. Baltic and Balkan states were particularly effective in using currency begs, he said.

The London-based Greenwood is credited as the architect of the Hong Kong dollar peg after a 1983 article he wrote for the Asian Monetary Monitor provided the basis for the government's policy to link the local currency to the greenback. The peg was established in the same year.

"A currency board mechanism is now ideal for a small economy, which has very large volume of trade or capital movements, relative to the size of its GDP," Greenwood told CNBC on Tuesday, noting Estonia was known as the "Hong Kong of the Baltic" region because of its similarity to the Asian trading hub. Estonia was pegged to the Deutsche mark and later the euro (Unknown: EURBA=) until it joined the single currency zone in 2011 , and is regarded as one of the region's economic success stories.

Brunei and some of the Caribbean countries were also well suited to a currency board, Greenwood said. Brunei pegs against the Singapore dollar (Exchange: SGD=), while the Bermudian, Cayman Islands and East Caribbean dollar are pegged to the greenback.

Argentina, which dropped the peso (Exchange: ARS=)'s peg to the dollar in 2002 after a punishing recession, was a rare peg fail ure because it "broke all the rules ... so you could hardly expect the system there to succeed," Greenwood said.

A dollar peg deprives Hong Kong of the ability to control its interest rates separately to the actions of the U.S. Federal Reserve , but the economist said in that, Hong Kong was little different to most emerging markets that worked to maintain a stable currency in relation to the dollar or another currency or basket.

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"They're basically managing their currencies, and that means that their business cycle is going to be related to what happens in the West," Greenwood explained.

Hong Kong's currency board is managed by a subcommittee of the Hong Kong Monetary Authority.

Greenwood added that, as a member of the board since the late 1990s, he knew of no instance in which Beijing attempted to influence Hong Kong's monetary policy decisions. According to the agreement set out in 1997 when Hong Kong was handed back by Britain to China, Hong Kong is permitted autonomy in every area other than defense and foreign affairs.

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