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Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong


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  • Hans Genberg

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


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 identity empirically the exact sources of the domestic shocks.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 172003.

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Length: 21 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:hkm:wpaper:172003

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  1. Stefan Gerlach & Matthew S. Yiu, 2002. "Unobservable-Component Estimates of Output Gaps in Five Asian Economies," Working Papers, Hong Kong Institute for Monetary Research 052002, Hong Kong Institute for Monetary Research.
  2. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper, Federal Reserve Bank of Atlanta 95-7, Federal Reserve Bank of Atlanta.
  3. Hans Genberg & Laurent Pauwels, 2003. "Inlation in Hong Kong, SAR- In Search of a Transmission Mechanism," Working Papers, Hong Kong Institute for Monetary Research 012003, Hong Kong Institute for Monetary Research.
  4. 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, Elsevier, vol. 19(1), pages 45-67, January.
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Cited by:
  1. Paul D. McNelis, 2009. "Structural Change and Counterfactual Inflation-Targeting in Hong Kong," Working Papers, Hong Kong Institute for Monetary Research 232009, Hong Kong Institute for Monetary Research.
  2. 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.
  3. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, Elsevier, vol. 23(1), pages 56-75, January.
  4. Hans Genberg, 2005. "External Shocks, Transmission Mechanisms and Deflation in Asia," Working Papers, Hong Kong Institute for Monetary Research 062005, Hong Kong Institute for Monetary Research.
  5. Mehrotra, Aaron N., 2007. "Exchange and interest rate channels during a deflationary era--Evidence from Japan, Hong Kong and China," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 188-210, March.


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