Feast and Famine: Explaining Big Swings in the Hong Kong Economy between 1981 and 2007

On average between 1981 and 2007, output per capita in Hong Kong grew at an annual rate of 3.2 percent. But economic performance over the period was far from even. Between 1987 and 1997, output per capita averaged 9.7 percent above its long run growth path. In 1997, the feast ended and the famine began. Over the next 11 years, output per capita averaged 5.2 percent below its long run path. This paper attempts to explain this big swing. We use two types of analysis. First, we use a nine-variable Bayesian Vector Autoregression and summarize the results as a set of stylized facts. Chief among these is the finding that economic activity in Hong Kong is highly sensitive to shocks of foreign origin. Second, we set our and estimate a dynamic, general equilibrium model which is able to account, at least qualitatively, for our stylized facts. We use the model to infer the relative importance of different shocks in accounting for feast and famine in Hong Kong.