At a press briefing, he said Hong Kong needed 'a continuous and vigorous intellectual exercise to consider whether the monetary system is serving the public interest'.

Yam wrote: 'There is no doubt the [peg] has, for almost 30 years of its existence, been a pillar of stability for Hong Kong, but there are costs involved.

'As with all jurisdictions operating with a fixed exchange rate, it is not possible for adjustments to economic shocks of all descriptions to work through the exchange rate.

'As a consequence, there is inherently a higher degree of volatility in economic activities and in domestic prices, which could be exacerbated if confidence in the determination and ability of the authorities to maintain the system wanes when the economy is under stress.'

The peg is considered a pillar of the city's financial stability and is such a sensitive issue that officials hardly ever talk publicly about it. Yam is the highest ranking former official to publicly question it.

This is all the more remarkable given that one of his career highlights as head of the Hong Kong Monetary Authority was his successful defence of the currency mechanism amid tremendous pressure during the 1997 Asia financial crisis. He pushed the overnight interbank rates up to 280 per cent to squeeze speculators from the currency market.

Now his questioning of a policy he once defended is bound to kick-start debates over the currency's future.

Many public figures in recent months have criticised the peg for contributing to inflation, but none of them carried the political and intellectual weight of Yam.

The Hong Kong government went on the defensive hours after the release of Yam's paper. Financial Secretary John Tsang Chun-wah said he was 'surprised' at the former central banker's view.

Chief executive-elect Leung Chun-ying dismissed it as 'nothing new' and stressed he would maintain the peg as an effective means to protect monetary stability.

Leung said: 'I hope the Hong Kong and international community would not be influenced by what Yam proposed.

'I repeat, the peg won't change, and won't have to be changed.'

Xinhua - considered the official mouthpiece of the central government - last night carried two reports.

One was on the Hong Kong government's rebuttal and another was a summary of Yam's paper.

Yam's paper is reminiscent of the favoured tactics of mainland central banker Zhou Xiaochuan, who used a 'personal academic paper' on several occasions to test the water before launching major policy changes.

The Hong Kong dollar rose to 0.06 per cent against the greenback as of 6.05pm - an hour after the announcement of the research paper and reactions from officials.

At one point, it touched a three-month high at HK$7.7535 but later returned to its original level.

The 12-month forwards gained 0.06 per cent to HK$7.7457. One of the ideas Yam suggested involved the widening or removal of the convertibility zone - now floating at US$1 to between HK$7.75 and HK$7.85 - and turn it into a 'corridor' for the exchange rate against US dollars, the yuan or a basket of currencies.

The width, scope and the centre of the 'corridor' would be subject to periodic review.

He said the administration could also do away with the exchange rate target, or zone, and focus on managing domestic monetary conditions.

His central argument is that the policy priority should shift from protecting currency stability to price stability, and that Hong Kong needs a more flexible monetary policy to maintain its position as an international financial centre. His successor and current HKMA chief executive Norman Chan Tak-lam said the pressure of rising inflation was not necessarily related to the peg system.

He added that the authority had done detailed studies and was satisfied the peg was still the most appropriate system for Hong Kong.

Yam yesterday denied he had any political motive in releasing the paper, but would be glad if 'it helps whoever is in a position to decide'.

Yam was the city's central banker for 16 years until he stepped down as the head of the Hong Kong Monetary Authority three years ago.

He was a supporter of failed chief executive candidate Henry Tang Ying-yen and was widely thought to be the brains behind Tang's financial policy platform.