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The Impact of US Monetary Policy and Other External Shocks on the Hong Kong Economy: A Factor-augmented VAR Approach

Author

Listed:
  • Hongyi Chen

    (Hong Kong Institute for Monetary Research)

  • Andrew Tsang

    (Hong Kong Institute for Monetary Research)

Abstract

This paper uses the factor-augmented VAR (FAVAR) framework to study the impact on the Hong Kong economy of the diverging monetary policies by the Fed, ECB and BoJ as well as the Mainland economy slowdown. The empirical results show that changes in US monetary policy mainly affect interest rate-sensitive sectors in Hong Kong; while real variables such as real GDP growth, unemployment rate are more sensitive to the economic slowdown in Mainland China. Monetary easing from the ECB and BoJ to some extent offsets the tightening of the Fed. The transmission channels of external shocks are through trade and capital markets. It is estimated that the combined effect of the four external shocks will on average lower Hong Kong¡¯s quarterly GDP growth by 0.6 percentage points and quarterly inflation by 0.2 percentage points in the first 4 quarters. However, Hong Kong¡¯s financial stability, particularly with regard to loan quality, banks¡¯ capital and liquidity, is well maintained by macroprudential policies suggesting that Hong Kong¡¯s financial system is resilient to external shocks.

Suggested Citation

  • Hongyi Chen & Andrew Tsang, 2016. "The Impact of US Monetary Policy and Other External Shocks on the Hong Kong Economy: A Factor-augmented VAR Approach," Working Papers 092016, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:092016
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    References listed on IDEAS

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    Cited by:

    1. Avdjiev, Stefan & Hale, Galina, 2019. "U.S. monetary policy and fluctuations of international bank lending," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 251-268.
    2. Terence Tai Leung Chong & M. S. Rafiq & Tingting Juni Zhu & Zhang Wu, 2019. "Are Prices Sticky In Large Developing Economies? An Empirical Comparison Of China And India," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(02), pages 341-363, March.
    3. Wu, Zhang & Chong, Terence Tai-Leung, 2019. "Price rigidity in China: Empirical results at home and abroad," China Economic Review, Elsevier, vol. 55(C), pages 218-235.

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    More about this item

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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