Hong Kong's inflation under the U.S. dollar peg : the Balassa-Samuelson effect or the Dutch disease?
Despite establishing the U.S. dollar peg in 1983, Hong Kong’s annual rate of inflation during the 1985-96 period was 4.3% higher than that of the U.S. The Dutch disease is found to be the main reason for Hong Kong’s high long-term rate of inflation. The Balassa-Samuelson effect contributed relatively little. From the 1980s, the relocation of Hong Kong manufacturing to southern China generated strong demand for Hong Kong’s tradable services to support the industrial activity in the mainland and subsequently raised the process of tradable services in Hong Kong. Growing wage costs and consumption demand, which accompanied the boom led by export of services, also brought about high prices in nontradables.
Imai, H. (1999). Hong Kong's inflation under the U.S. dollar peg : the Balassa-Samuelson effect or the Dutch disease? (CAPS Working Paper Series No.97). Retrieved from Lingnan University website: http://commons.ln.edu.hk/capswp/26
CAPS Working Paper Series No.97 (9/99)