Business cycles in a small open economy: The case of Hong Kong

Paulina Elisa Echeverria Garaigorta and María Amaya Iza Padilla

No 1988-088X, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: This paper analyzes the business cycle properties of the Hong Kong economy during the 1982-2004 period, which includes the financial crisis experienced in 1997-98. We show that output, output growth rate and real interest rates volatilities in Hong Kong are higher than their respective average volatilities among developed economies. In this paper, we build a stochastic neoclassical small open economy model that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous Total Factor Productivity (transitory and permanent), real interest rates shocks and financial frictions. The main findings are that the trend volatility has to be higher than the volatility of the transitory fluctuations around the trend; that the volatility of real interest rates are mainly due to country risk spread, and that financial frictions matter to explain real interest rates countercyclicality.

Keywords: business cycles; financial frictions; total factor productiviy; country risk spread; small open economy; neoclassical model (search for similar items in EconPapers)
Date: 2011-12
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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