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Hong Kong Consumer Prices are Flexible

  • James Yetman

    (Bank for International Settlements)

It is generally believed that prices in Hong Kong are flexible. If this received wisdom is correct then the Currency Board system, which precludes a nominal exchange rate adjustment in response to macroeconomic shocks, may have little macroeconomic cost. However, this belief in price flexibility is based on very little empirical evidence. In this paper, we seek to rectify this in a study the behaviour of sub-indices of the Hong Kong Consumer Price Index. We compare estimated moments in the data against the predictions of models based on flexible prices, capacity constraints, rational inattention, and menu costs. We find evidence in favour of flexible prices.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 052009.

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Length: 38 pages
Date of creation: Jan 2009
Handle: RePEc:hkm:wpaper:052009
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