Hong Kong's Growth Synchronisation with China and the U.S.: A Trend and Cycle Analysis
HKIMR Working Paper No.15/2014
29 Pages Posted: 8 Jul 2014 Last revised: 7 Oct 2014
Date Written: July 7, 2014
This paper investigates the synchronisation of Hong Kong's economic growth with mainland China and the US. We identify trends of economic growth based on the permanent income hypothesis. Specifically, we first confirm whether real consumption in Hong Kong and mainland China satisfies the permanent income hypothesis, at least in a weak form. We then identify the permanent and transitory components of income of each economy using a simple state-space model. We use structural vector autoregression models to analyse how permanent and transitory shocks originating from mainland China and the US affect the Hong Kong economy, and how such influences evolve over time. Our main findings suggest that transitory shocks from the US remain a major driving force behind Hong Kong’s business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong’s trend growth.
Keywords: Business Cycle Synchronisation, Permanent Income Hypothesis, Stochastic Trend, Structural Vector Autoregression
JEL Classification: E21, F44
Suggested Citation: Suggested Citation