DEFLATION IN HONG KONG SAR

Abstract. This paper examines the causes of deflation in Hong Kong, exploring whether deflation reflects a prolonged process of cyclical adjustment or results from price equalization pressures arising from structural integration with Mainland China. To gauge the relative importance of these factors, the econometric analysis presented in this paper focuses on the price dynamics with Shenzhen, a neighboring city in Mainland China. It finds that the source of deflation is mostly cyclical, with the structural factor of price equalization playing a minor role. A qualitative analysis of the channels of price equalization and deflationary persistence corroborates these findings.