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A Quantitative Study of Hong Kong's Fiscal Policy

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  • Wong, Chi Shing

Abstract

Given the adoption of the linked exchange rate since October 1983, fiscal policy becomes the only measurement for stabilizing the Hong Kong economy. This paper attempts to establish a framework for evaluating the fiscal effect to prevent the abuse of fiscal measures. The empirical study of Jha et al. (2010) revealed the significant negative impact of fiscal effect in Hong Kong, which violates the classical view of fiscal policy. A similar result has been found by adopting another structural vector autoregression (SVAR) model proposed by Ravn et al. (2007). An omission of control variables in the quantitative model is possible. The MSCI AC (All countries) Pacific Index has been introduced as an international block in the SVAR model proposed by Ravn et al. (2007). The fiscal effect becomes positive and standardizes with the previous fiscal studies. The replacement of investment variable in the modified model suggests that positive fiscal innovation does not encounter with the crowding out effect on investment. The estimations for the decomposition policy expenditures indicate that compositional effect exists, and it undermines the fiscal multiplier. The estimations also reveal that the innovation in recurrent expenditure contributes mainly to the fiscal effect. With the persistence and significant impact on output, concentrating on infrastructure expenditure is the recommendation on Hong Kong fiscal policy to maximize the expansionary effect in the short run.

Suggested Citation

  • Wong, Chi Shing, 2012. "A Quantitative Study of Hong Kong's Fiscal Policy," MPRA Paper 41431, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:41431
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    References listed on IDEAS

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    1. Ilzetzki, Ethan Oriel & Mendoza, Enrique G. & Végh, Carlos A., 2010. "How big (small?) are fiscal multipliers?," LSE Research Online Documents on Economics 121725, London School of Economics and Political Science, LSE Library.
    2. Ricardo M. Sousa & António Afonso, 2008. "Fiscal Policy, Housing and Stock Prices," NIPE Working Papers 21/2008, NIPE - Universidade do Minho.
    3. Ravn, Morten & Uribe, Martín & Schmitt-Grohé, Stephanie, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," CEPR Discussion Papers 6541, C.E.P.R. Discussion Papers.
    4. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    5. Giordano, Raffaela & Momigliano, Sandro & Neri, Stefano & Perotti, Roberto, 2007. "The effects of fiscal policy in Italy: Evidence from a VAR model," European Journal of Political Economy, Elsevier, vol. 23(3), pages 707-733, September.
    6. Buckle, Robert A. & Kim, Kunhong & Kirkham, Heather & McLellan, Nathan & Sharma, Jarad, 2007. "A structural VAR business cycle model for a volatile small open economy," Economic Modelling, Elsevier, vol. 24(6), pages 990-1017, November.
    7. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    8. Dungey, Mardi & Fry, Renée, 2009. "The identification of fiscal and monetary policy in a structural VAR," Economic Modelling, Elsevier, vol. 26(6), pages 1147-1160, November.
    9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    10. Wensheng Peng & Jiming Ha & Cynthia Leung & Kelvin Fan, 2003. "The fiscal deficit and macroeconomic stability in Hong Kong SAR," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal issues and central banking in emerging economies, volume 20, pages 131-139, Bank for International Settlements.
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    More about this item

    Keywords

    Hong Kong; Fiscal Policy; Structural VAR;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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