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In the year 1998 immediately following the asian

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In the year 1998, immediately following the Asian Financial Crisis,the real export fell by 4.3% following almost a decade of double digitgrowth. Real GDP also fell by 5.5% and real consumption dropped by6.8%. Import price inflation was negative 4.9% and the nominal effectiveexchange rate appreciated by 5.5%. The nominal best lending interestrate reached a peak of 9.9% with consumer price inflation at 2.9%, thereal best lending interest rate was at 7%. In the sub-period 1999-2002 theeconomy rebounded briefly but succumbed to the 2001 global economicrecession and deflation began to set in firmly; the bursting of the internetasset bubble in 2000 also took its toll.The year 2003 was one of a great reversal in economic fortune. At thebeginning of the year there was great promise of an economic recoverystarting from the rebound that began towards the end of 2002 in realexports growth. The Hong Kong Dollar followed the US Dollar andstarted to depreciate. Import price deflation was beginning to end.Nominal interest rates were beginning to adjust downwards. But HongKong would be ravaged by Severe Acute Respiratory Syndrome (SARS).the Hong Kong economy shrank by 0.7% year-on-year in the secondquarter from the 4.3% growth achieved in the first quarter of 2003. Realconsumption dropped 1.1%. Nevertheless, strong global economicgrowth contributed to the rapid economic rebound starting from the thirdquarter of 2003.In the sub-period 2004-2005 the evidence of broadly based economicrecovery is reflected in strong growth of external trade, falling interestrates, and rising consumption and investment. The Hong Kong Dollar
Alan K. F. Siu and Yue-Chim Richard Wong48continued to weaken and import prices were rising. Deflation haddisappeared and a modest amount of price inflation emerged. Real GDPwas growing at 7.8%.To what extent is deflation in Hong Kong a result of structural factorsas opposed to cyclical factors?According to a recent study by the Hong Kong Monetary Authority(April 2002), the average price differential, based on 300 products,between Hong Kong and 4 Mainland cities, namely Shenzhen,Guangzhou, Shanghai and Beijing, was estimated to be around 20 percent in 2001. They found that this differential would depress the overallprice level in Hong Kong by less than 0.5 per cent over a one-yearperiod. Prices in Hong Kong and the four Mainland cities have beenconverging, albeit very slowly. The existing price differential would onaverage be reduced by half in 6.5 years.Another recent study by the International Monetary Fund (May2002), using the ratio of the consumer prices indices in Hong Kong andShenzhen as a measure of the average price gap, suggests that the pricelevel gap plays only a minor role in explaining the deflation in HongKong. Cyclical factors, as proxied by unemployment rate, credit growthand the nominal effective exchange rate, are much more importantdeterminants of deflation in Hong Kong.

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Term
Spring
Professor
Sanders
Tags
Economics, capital flight, 1997 Asian Financial Crisis

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