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The Role of Productivity and Financial Frictions in the Business Cycles of a Small Open Economy: Hong Kong 1984–2011

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  • Paulina Etxeberria-Garaigorta
  • Amaia Iza

Abstract

This paper analyzes the business cycle properties of the Hong Kong economy during the 1984–2011 period, which includes the financial crisis experienced in 1997/98 and the economic crisis of 2008–2010. We show that the volatility respectively, of output, of the growth rate of output and of real interest rates in Hong Kong are higher than the corresponding average volatility among developed economies. Furthermore, interest rates are countercyclical. We build a stochastic neoclassical small open-economy model estimated with a Bayesian likelihood approach that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous total factor productivity (TFP) shocks (transitory and permanent), real interest rate shocks and financial frictions. The main finding is that financial frictions, jointly with the assumption that the country spread is endogenous, seem important in explaining the countercyclicality of the real interest rates.

Suggested Citation

  • Paulina Etxeberria-Garaigorta & Amaia Iza, 2015. "The Role of Productivity and Financial Frictions in the Business Cycles of a Small Open Economy: Hong Kong 1984–2011," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 400-414, May.
    • Handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:400-414
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    File URL: http://hdl.handle.net/10.1111/rode.12150
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    References listed on IDEAS

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