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Inlation in Hong Kong, SAR- In Search of a Transmission Mechanism

Author

Listed:
  • Hans Genberg

    (Graduate Institute of International Studies, Hong Kong Institute for Monetary Research)

  • Laurent Pauwels

    (Graduate Institute of International Studies)

Abstract

Inflation in a country with a currency board is usually believed to be highly dependent on external factors. Important questions for understanding the dynamics of inflation are (i) how best to measure these factors and (ii) how to model the transmission mechanism. This paper brings evidence to both questions. First, the paper shows that using CPI-based measures of foreign inflation does not adequately capture external influences on inflation in Hong Kong. Second, the paper shows that import prices and wages have a significant causal role. Together these conclusions suggest that Hong Kong¡¦s price dynamics can be modeled by a Phillips Curve in which marginal cost of production plays an important role. When we estimate a New Phillips curve model for Hong Kong, a significant forward-looking component to expectations is identified. In addition, we find that prices are relatively flexible in HK, with adjustments taking place almost twice as fast as in the United States. Finally import prices and property rental rates appear to be important components of marginal cost of production alongside wages. More traditional versions of the Phillips curve also fit the data quite well. Even in this traditional specification, however, measures based on changes in production cost outperform measures of excess demand as forcing variables.

Suggested Citation

  • Hans Genberg & Laurent Pauwels, 2003. "Inlation in Hong Kong, SAR- In Search of a Transmission Mechanism," Working Papers 012003, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:012003
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    References listed on IDEAS

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    Cited by:

    1. Paul D. McNelis, 2009. "Structural Change and Counterfactual Inflation-Targeting in Hong Kong," Working Papers 232009, Hong Kong Institute for Monetary Research.
    2. Hans Genberg, 2003. "Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong," Working Papers 172003, Hong Kong Institute for Monetary Research.
    3. Kwan, Yum K. & Leung, Charles Ka Yui & Dong, Jinyue, 2015. "Comparing consumption-based asset pricing models: The case of an Asian city," Journal of Housing Economics, Elsevier, vol. 28(C), pages 18-41.
    4. Hans Genberg & Laurent L. Pauwels, 2003. "An Open Economy New Keynesian Phillips Curve: Evidence from Hong Kong," IHEID Working Papers 03-2003, Economics Section, The Graduate Institute of International Studies.
    5. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, vol. 23(1), pages 56-75, January.
    6. Echeverria Garaigorta, Paulina Elisa & Iza Padilla, María Amaya, 2010. "Prices and the Real Exchange Rate in Hong Kong: 1985-2006," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    7. Weshah A. Razzak, 2003. "Wage-Price Dynamics, the Labour Market and Deflation in Hong Kong," Working Papers 242003, Hong Kong Institute for Monetary Research.

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