Macroeconomic Implications for Hong Kong SAR of Accommodative U.S. Monetary Policy
IMF Working Papers, November 1, 2009
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Bibliographic details
- Authors: Papa M N'Diaye
- Published: November 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874020.001
Overview
- Title: Macroeconomic Implications for Hong Kong SAR of Accommodative U.S. Monetary Policy
- Author: Papa M N'Diaye
- Date: November 1, 2009
- Summary: The paper examines potential macroeconomic implications for Hong Kong SAR of accommodative U.S. monetary policy using model simulations, focusing on the resumption of the credit channel and its effects on goods and asset market inflation, credit expansion, and macroeconomic volatility.
Key findings from the simulations
- A resumption of the credit channel in Hong Kong SAR has the potential to create inflation in both goods and asset markets.
- Expansionary financial conditions will likely have a greater impact in fueling asset price inflation, manifested in the model through a strong increase in equity prices.
- Higher asset prices could, through a financial accelerator mechanism, lead to further credit expansion and an upward cycle of asset prices and credit.
- The credit-asset price cycle, if unchecked, can potentially feed into volatility in consumption, output and employment and complicate macroeconomic management.
- The simulation results suggest there is a role for countercyclical prudential regulations to mitigate the amplitude of the cycle and lessen the financial and macroeconomic volatility associated with an unwinding of the credit-asset price cycle.
Model behavior and transmission channels
- Credit channel resumption → increased lending and credit expansion.
- Asset-price response: strong increase in equity prices under expansionary financial conditions.
- Feedback loop: higher asset prices → financial accelerator → further credit expansion → upward cycle in asset prices and credit.
- Macroeconomic spillovers: volatility transmitted to consumption, output, and employment.
Risks and macroeconomic implications
- Asset-price inflation greater than goods inflation in simulated scenarios.
- Potential for pronounced cycles in asset prices and credit that, if not managed, increase macroeconomic volatility.
- Complications for macroeconomic management due to amplified volatility in real economic variables (consumption, output, employment).
Policy recommendations
- Implement countercyclical prudential regulations to:
- Mitigate the amplitude of the credit-asset price cycle.
- Lessen financial and macroeconomic volatility associated with an unwinding of the cycle.