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Long-run and Cyclic Movements in the Unemployment Rate in Hong Kong: A Dynamic, General Equilibrium Approach

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Author Info
Michael K. Salemi (University of North Carolina, Hong Kong Institute for Monetary Research)
Abstract

Prior to the late 1990s, low unemployment was a standard feature of macroeconomic life in Hong Kong. Between 1985 and 1997, the unemployment rate averaged 2.5 percent. But the picture changed dramatically thereafter with the unemployment rate rising to 6.2 percent by 1999 and remaining above 5 percent through 2005. What caused the large and sustained increase? This paper provides some answers with an analysis based on a dynamic, general equilibrium model of a small, open economy in which wage bargaining occurs. The model is calibrated using Hong Kong data for 1985 to 2005 and the calibrated model is analyzed in two ways. First, a set of comparative statics exercises investigates whether the natural rate of unemployment increased. Second, a dynamic analysis investigates whether the observed path of the unemployment rate might have been a temporary, although sustained, response to shocks. I conclude that the data favor the latter explanation.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 192007.

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Length: 40 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:192007

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  1. Lindblad, Hans & Sellin, Peter, 2003. "The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach," Working Paper Series 152, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  2. Hans Genberg & Laurent L. Pauwels, 2004. "Wage-Price Dynamics and Deflation in Hong Kong," HEI Working Papers 06-2004, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
    Other versions:
  3. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2001. "Shocks and Institutions in a Job Matching Model," CEPR Discussion Papers 2970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
  6. Chang-Tai Hsieh & Keong T. Woo, 2005. "The Impact of Outsourcing to China on Hong Kong's Labor Market," American Economic Review, American Economic Association, vol. 95(5), pages 1673-1687, December. [Downloadable!]
  7. Hans Genberg & LaurentL. Pauwels, 2005. "An Open-Economy New Keynesian Phillips Curve: Evidence From Hong Kong," Pacific Economic Review, Blackwell Publishing, vol. 10(2), pages 261-277, 06. [Downloadable!] (restricted)
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  8. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
  9. Salemi, Michael K, 1999. "Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-25, Jan.-Feb.. [Downloadable!]
  10. Petro Peretto, 2006. "The Employment (and Output) of Nations: Theory and Policy Implications," 2006 Meeting Papers 280, Society for Economic Dynamics. [Downloadable!]
  11. Wouter J. den Haan & Garey Ramey & Joel Watson, 1997. "Job Destruction and Propagation of Shocks," NBER Working Papers 6275, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Abbott, A J & De Vita, G, 2002. "Long-Run Price and Income Elasticities of Demand for Hong Kong Exports: A Structural Cointegrating VAR Approach," Applied Economics, Taylor and Francis Journals, vol. 34(8), pages 1025-32, May. [Downloadable!] (restricted)
  13. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June. [Downloadable!] (restricted)
    Other versions:
  14. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!]
  15. Pietro F. Peretto, 2006. "The Employment (and Output) of Nations: Theory and Policy Implications," DEGIT Conference Papers c011_014, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
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