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

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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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  • Hans Genberg, 2003. "Foreign versus domestic factors as sources of macroeconomic fluctuations in Hong Kong," IHEID Working Papers 05-2003, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heiwp05-2003
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    1. 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.
    2. 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.
    3. 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.
    4. Gerlach, Stefan & Yiu, Matthew, 2002. "Unobservable-Components Estimates of Output Gaps in Five Asian Economies," CEPR Discussion Papers 3393, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Hajar Fanchy & Amal El Mzabi & Ahmed Hefnaoui, 2023. "Identification of fluctuations origins in the Business Cycle in Morocco: Reduced DSGE modelling," Post-Print hal-04304857, HAL.
    2. Hans Genberg, 2005. "External Shocks, Transmission Mechanisms and Deflation in Asia," Working Papers 062005, Hong Kong Institute for Monetary Research.
    3. Paul D. McNelis, 2009. "Structural Change and Counterfactual Inflation-Targeting in Hong Kong," Working Papers 232009, Hong Kong Institute for Monetary Research.
    4. Andrea Fracasso, 2006. "The role of foreign and domestic factors in the evolution of the Brazilian EMBI spread and debt dynamics," IHEID Working Papers 22-2007, Economics Section, The Graduate Institute of International Studies, revised Jul 2007.
    5. S. S. Abere & T. O. Akinbobola, 2020. "External Shocks, Institutional Quality, and Macroeconomic Performance in Nigeria," SAGE Open, , vol. 10(2), pages 21582440209, May.
    6. Shin-ichi Fukuda & Junji Yamada, 2012. "Why Did Large-scale Deflation Occur? What Did It Bring About?: From Hong Kong's Experiences in the First Half of the 2000s," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(1), pages 93-122, June.
    7. 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.
    8. 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.
    9. Marcelo Sánchez, 2010. "What Drives Business Cycles and International Trade in Emerging Market Economies?," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 28(61), pages 198-271, August.
    10. repec:zbw:bofitp:2005_017 is not listed on IDEAS
    11. 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.
    12. 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.

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    Keywords

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