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Foreign versus domestic factors as sources of macroeconomic fluctuations in Hong Kong

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Hans Genberg () (IUHEI)

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Abstract

This paper uses a semi-structural vector autoregression approach to estimate the relative importance of domestic and foreign shocks as sources of macroeconomic fluctuations in Hong Kong since the adoption of the currency board. We find that external factors are clearly dominant in the medium- to long run. In view of the highly open nature of the Hong Kong economy and the linkages implied by the currency board arrangement, it is perhaps not unexpected. However, that these factors should account for fifty percent or more of unexpected fluctuations in real gdp and the gdp deflator at shorter horizons of one to two years is more surprising, and it is large in comparisons with other highly open small economies. Even if external shocks are dominant sources of macroeconomic fluctuations, there remain significant short-term influences of domestic variables. For example, in the historical decomposition of the evolution of output growth and inflation we discovered a significant role for domestic factors in the recent recession. Their impact resembles very much those that would be generated by a conventional aggregate supply contraction. A challenge for future research is to identify empirically the exact sources of domestic shocks.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 05-2003.

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Length: 20
Date of creation: Jun 2003
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Handle: RePEc:gii:giihei:heiwp05-2003

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Keywords: new keynesian monetary policy; vector autoregression; macroeconomic fluctuations; economic cycles;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August. [Downloadable!] (restricted)
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  2. Genberg, Hans & Salemi, Michael K. & Swoboda, Alexander, 1987. "The relative importance of foreign and domestic disturbances for aggregate fluctuations in the open economy : Switzerland, 1964-1981," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 45-67, January. [Downloadable!] (restricted)
  3. Hans Genberg & Laurent L. Pauwels, 2002. "Inflation in Hong Kong, SAR: In search of a transmission mechanism," HEI Working Papers 09-2002, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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  4. Stefan Gerlach & Matthew S. Yiu, 2002. "Unobservable-Component Estimates of Output Gaps in Five Asian Economies," Working Papers 052002, Hong Kong Institute for Monetary Research. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dong He & Frank Leung & Philip Ng, 2007. "How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?," Working Papers 0717, Hong Kong Monetary Authority. [Downloadable!]
  2. Hans Genberg, 2005. "External Shocks, Transmission Mechanisms and Deflation in Asia," Working Papers 062005, Hong Kong Institute for Monetary Research. [Downloadable!]
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  3. Mehrotra, Aaron, 2005. "Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China," BOFIT Discussion Papers 17/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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