Since 1998 Hong Kong has experienced over 16 quarters of deflation. Some asset prices such as factory and office space prices started to fall in early 1990s, a long time before the Asian crisis. The number of firms and businesses that have moved out of Hong Kong are not readily available, but it is quite plausible that firms and businesses relocated to the Mainland because they expected future marginal costs to fall in response to Hong Kong¡¦s handover to China in 1997. We estimate a Phillips curve specification, where changes in the price level are a function of expected inflation and the marginal cost. This model outperforms (in-and-out-of-sample) the traditional Phillips curve specification and other models of wage-price dynamics. Because the marginal cost is basically unit labour cost, the model suggests that wage and productivity dynamics play an important role in explaining price dynamics.
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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number
242003.
Length: 37 pages Date of creation: Dec 2003 Date of revision: Handle: RePEc:hkm:wpaper:242003
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General C5 - Mathematical and Quantitative Methods - - Econometric Modeling
References listed on IDEAS 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.:
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