Hong Kong's High Inflation Under the US Dollar Peg: The Balassa-Samuelson Effect or the Dutch Disease?
Despite the peg to the US dollar established in 1983, Hong Kong's annual rate of inflation during the 1985 to 1997 period was 4.6% higher than that of the US The Dutch disease was the main source of Hong Kong’s high long-term inflation. The contribution of the Balassa-Samuelson effect was small. The relocation of Hong Kong manufacturing to southern China generated strong demand for Hong Kong’s tradable services to support the industrial activity across the border and re-exports through Hong Kong ports, and subsequently raised the prices of tradable services. The service-export-led boom brought about rapid wage increases, which extended price hikes to nontradables.