||The currency board system has sometimes been identified as the solution to the recent financial turmoil in many countries. Hong Kong, having the experience of abandoning and re-adopting the currency board, offers a natural opportunity to test its macroeconomic implications. We use the method of Blanchard and Quah (1989) to show that the structural equations and the characteristics of permanent and transitory shocks have significantly changed since re-adopting the regime in 1983. The evidence indicates that its currency board is less susceptible to supply shocks, but demand shocks can create greater volatility. Hong Kong’s decent performance is due mainly to the stable fiscal policy. Our analysis shows that two-thirds of the reduction in observed output and inflation volatility are explained by the adoption of the currency board, while the remainders are explained by changes in the external environment. The system does not rule out monetary collapse, however.