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Exchange Rate Pass-Through to Domestic Inflation in Hong Kong

Author

Listed:
  • Li-gang Liu

    (Research Department, Hong Kong Monetary Authority)

  • Andrew Tsang

    (Research Department, Hong Kong Monetary Authority)

Abstract

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.

Suggested Citation

  • Li-gang Liu & Andrew Tsang, 2008. "Exchange Rate Pass-Through to Domestic Inflation in Hong Kong," Working Papers 0802, Hong Kong Monetary Authority.
  • Handle: RePEc:hkg:wpaper:0802
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP08_02_full.pdf
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    References listed on IDEAS

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    1. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    2. Jose Manuel Campa & Linda S. Goldberg, 2008. "Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why?," NBER Chapters,in: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17), pages 139-176 National Bureau of Economic Research, Inc.
    3. Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October.
    4. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    6. Hans Genberg & LaurentL. Pauwels, 2005. "Wage-Price Dynamics And Deflation In Hong Kong," Pacific Economic Review, Wiley Blackwell, vol. 10(2), pages 191-216, June.
    7. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    8. 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.
    9. Campa, José Manuel & Goldberg, Linda S., 2006. "Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates," CEPR Discussion Papers 5650, C.E.P.R. Discussion Papers.
    10. 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.
    11. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    12. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," International Finance Discussion Papers 744, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
    2. Matthew Kofi Ocran, 2010. "Exchange Rate Pass-Through To Domestic Prices: The Case of South Africa," Prague Economic Papers, University of Economics, Prague, vol. 2010(4), pages 291-306.

    More about this item

    Keywords

    Exchange rate pass-through; Phillips Curve; Hong Kong;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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