Deflation in Hong Kong SAR, Issues 2003-2077
This paper examines the causes of deflation in Hong Kong SAR, exploring whether it reflects a prolonged process of adjustment to cyclical shocks or whether it results from price equalization pressures arising from structural integration with mainland China. To gauge the relative importance of these factors, the paper provides both an econometric and a qualitative analysis of the price dynamics between Hong Kong SAR and Shenzhen, a neighboring city in mainland China. It finds that the role of price equalization as a source of deflation is minor. Deflation in Hong Kong SAR is best explained by successive cyclical shocks which have been amplified by balance-sheet and wealth effects.
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amplified analysis balance-sheet and wealth channels of price choice of Shenzhen coefficient coefficient of determination components CPI Inflation decline deflation in Hong deflationary impact deflationary pressure Determinants of Deflation differential between Hong downturn dynamics between Hong econometric economy was hit effective exchange rate explanatory power factor price equalization Guangdong Guangzhou Hong Kong price Hong Kong residents Hong Kong SAR Independent Variables individual price data inflation differential integration with mainland Kong and Shenzhen Kong price level level gap lagged levels of Hong linked exchange rate low-skilled mainland China mark-up margins Nominal credit growth nominal effective exchange nominal wages overall CPI Overall Deflation paper percent persistence of deflation price adjustment price convergence price developments price differentials price equalization pressure price level gap pro-cyclical qualitative Quarterly data relative importance residential property market SAR and Shenzhen SAR's sector SMEs source of deflation structural and cyclical structural factor Variations in unemployment volatility wealth effects