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Hong Kong Consumer Prices are Flexible

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  • James Yetman

    (Bank for International Settlements)

Abstract

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.

Suggested Citation

  • James Yetman, 2009. "Hong Kong Consumer Prices are Flexible," Working Papers 052009, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:052009
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    References listed on IDEAS

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    Cited by:

    1. Paul D. McNelis, 2009. "Structural Change and Counterfactual Inflation-Targeting in Hong Kong," Working Papers 232009, Hong Kong Institute for Monetary Research.
    2. Michael Cheng & Wai-Yip Alex Ho, 2009. "A Structural Investigation into the Price and Wage Dynamics in Hong Kong," Working Papers 0920, Hong Kong Monetary Authority.
    3. Funke, Michael & Paetz, Michael & Pytlarczyk, Ernest, 2011. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Economic Modelling, Elsevier, vol. 28(1-2), pages 316-334, January.

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