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Exchange Rate Pass-Through to Domestic Inflation in Hong Kong

  • Li-gang Liu

    (Research Department, Hong Kong Monetary Authority)

  • Andrew Tsang

    (Research Department, Hong Kong Monetary Authority)

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    This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. We first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. We find that Hong Kong¡¦s exchange rate pass-through to import prices is relatively high compared to the OECD average, although Hong Kong also witnessed a decline of pass-through after 1991. With respect to exchange rate pass-through to domestic prices, we find that a 10% depreciation of the US dollar against all currencies except for the Hong Kong dollar would lead domestic prices to increase by 0.82 and 1.61 percent in the short run and medium run, respectively. These results are also broadly consistent with those obtained from a calibration exercise that estimates exchange rate pass-through to domestic prices via channels of the tradable and non-tradable goods.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP08_02_full.pdf
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    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0802.

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    Length: 23 pages
    Date of creation: Mar 2008
    Date of revision:
    Handle: RePEc:hkg:wpaper:0802
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    1. Corsetti, Giancarlo & Dedola, Luca, 2002. "Macroeconomics of international price discrimination," Working Paper Series 0176, European Central Bank.
    2. Maurice Obstfeld & Kenneth Rogoff, 2000. "New Directions for Stochastic Open Economy Models," International Finance 0004002, EconWPA.
    3. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    4. Campa, José Manuel & Goldberg, Linda S., 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
    5. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
    6. Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October.
    7. Hans Genberg & LaurentL. Pauwels, 2005. "Wage-Price Dynamics And Deflation In Hong Kong," Pacific Economic Review, Wiley Blackwell, vol. 10(2), pages 191-216, 06.
    8. Jose Manuel Campa & Linda S. Goldberg, 2006. "Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates," Staff Reports 247, Federal Reserve Bank of New York.
    9. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
    10. Jose Manuel Campa & Linda S. Goldberg, 2006. "Pass-through of exchange rates to consumption prices: what has changed and why," Staff Reports 261, Federal Reserve Bank of New York.
    11. Li-gang Liu & Jian Chang & Andrew Tsang, 2006. "Forecasting the Non-Rental Component of Hong Kong's CCPI Inflation - an Indicator Approach," Working Papers 0603, Hong Kong Monetary Authority.
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