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MACROECONOMIC VOLATILITY AND COUNTERFACTUAL INFLATION‐TARGETING IN HONG KONG
Author(s) -
LIM G. C.,
MCNELIS PAUL D.
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2012.00584.x
Subject(s) - economics , counterfactual thinking , volatility (finance) , monetary economics , inflation (cosmology) , macroeconomics , keynesian economics , econometrics , psychology , physics , theoretical physics , social psychology
The present paper evaluates macroeconomic adjustment in Hong Kong with an estimated dynamic stochastic general equilibrium (DSGE) model under a fixed exchange rate regime. We find that exports and world inflation shocks are the dominant sources of GDP volatility, with the risk premium taking on importance during the Asian crisis after 1997. A counterfactual simulation, assuming a flexible exchange rate regime with inflation targeting, shows that inflation would have decreased slightly, but interest‐rate volatility would have increased significantly. The welfare gains from switching out of the currency board system appear to be marginal.