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Wage-Price Dynamics, the Labour Market and Deflation in Hong Kong

Author

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  • Weshah A. Razzak

    (Labour Market Policy Group)

Abstract

Since 1998 Hong Kong has experienced over 16 quarters of deflation. Some asset prices such as factory and office space prices started to fall in early 1990s, a long time before the Asian crisis. The number of firms and businesses that have moved out of Hong Kong are not readily available, but it is quite plausible that firms and businesses relocated to the Mainland because they expected future marginal costs to fall in response to Hong Kong¡¦s handover to China in 1997. We estimate a Phillips curve specification, where changes in the price level are a function of expected inflation and the marginal cost. This model outperforms (in-and-out-of-sample) the traditional Phillips curve specification and other models of wage-price dynamics. Because the marginal cost is basically unit labour cost, the model suggests that wage and productivity dynamics play an important role in explaining price dynamics.

Suggested Citation

  • Weshah A. Razzak, 2003. "Wage-Price Dynamics, the Labour Market and Deflation in Hong Kong," Working Papers 242003, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:242003
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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. Echeverria Garaigorta, Paulina Elisa & Iza Padilla, María Amaya, 2010. "Prices and the Real Exchange Rate in Hong Kong: 1985-2006," DFAEII Working Papers 2010-14, University of the Basque Country - Department of Foundations of Economic Analysis II.
    3. Blagov, Boris & Funke, Michael, 2013. "The regime-dependent evolution of credibility : A fresh look at Hong Kong s linked exchange rate system," BOFIT Discussion Papers 24/2013, Bank of Finland, Institute for Economies in Transition.

    More about this item

    Keywords

    Deflation; Phillips curve; Wages; Real Marginal Cost; Mark-up;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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