HONG KONG'S INFLATION AND DEFLATION UNDER THE US DOLLAR PEG: THE BALASSA‐SAMUELSON EFFECT OR EXPORT PRICE SHOCKS?

Hiroyuki Imai

The Developing Economies, 2010, vol. 48, issue 3, 319-344

Abstract: Hong Kong's US dollar peg, adopted in 1983, has failed to deliver price stability. Hong Kong experienced high inflation before the Asian financial crisis and prolonged deflation after it. The annual rate of inflation (GDP‐deflator based) was 7.4% in the first period (1985–97) and −2.0% in the second (1998–2007). There was no clear trend for the inflation rate to converge to the US level. The nominal anchor via a fixed exchange rate in Hong Kong had an upward and downward drift in the order of 4% from the US inflation rate, casting doubt on the anchor's efficacy. Despite Hong Kong's high output growth relative to that of the United States, the Balassa‐Samuelson effect was not the main factor behind the pre‐Asian crisis inflation. Price shocks in service exports played a major role in Hong Kong's general prices through the two periods.

Date: 2010
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