Title: Internal and External Shocks in Hong Kong: Empirical Evidence and Policy Options
Reference Number: 1086
Publication Date: May 2004
JEL Classifcation: E37, E47

Petra Gerlach-Kristen
The University of Hong Kong

This paper estimates a small structural model of the Hong Kong economy using quarterly data for the period 1990 to 2002 on the output gap, CPI, property price and import price inflation, the nominal interest rate and the nominal effective exchange rate. We find that fluctuations in the output gap are mainly driven by external factors, while CPI inflation also is affected by domestic shocks. The paper then provides counterfactual simulations of how the economy would have evolved under alternative monetary arrangements. To that end, we simulate the model using an interest rate reaction function of the Taylor type and a Singapore-style reaction function of the nominal effective exchange rate. It appears that these alternative regimes might have led to different inflation trajectories but would have had a limited impact on the path of economic activity.

Published in Economic Modelling 23:1 (2005), pp. 56-75.

Key words: Hong Kong, simulation, structural VAR, currency board, Taylor rule, exchange rate rule

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Last modified: 01/24/2007