HONG KONG INSTITUTE FOR MONETARY RESEARCH.pdf

HONG KONG INSTITUTE FOR MONETARY RESEARCH HONG KONG’S GROWTH SYNCHRONISATION WITH CHINA AND THE U.S.: A TREND AND CYCLE ANALYSIS Dong He, Wei Liao and Tommy Wu HKIMR Working Paper No. 15/20 14 July 20 14 Hong Kong Institute for Monetary Research 香港金融研究中心 (a company incorporated with limited liability) All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. Hong Kong’s Growth Synchronisation with China and the U.S.: A Trend and Cycle Analysis* Dong He** Hong Kong Monetary Authority and # Wei Liao International Monetary Fund and Tommy Wu** Hong Kong Monetary Authority July 2014 Abstract This paper investigates the synchronisation of Hong Kongs 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 t