Hong Kong Model: The Revised 1990 Version

Abstract

In recent years, the error correction model has gained popularity for dynamic equations in quantitative economics. It has been applied to such main stream problems as personal consumption, investment, and the demand for money.² As the error correction process is attractive, in that it contains both levels and differences of variables and is compatible with long-run equilibrium behavior, we have introduced the error correction mechanism to the ERC econometric forecasting model of the Hong Kong economy Constructed by Lin and Chou (1985). The major changes in the model lie in the specification of private consumption, private investment in building and construction, wages, prices, and the demand for money. From the estimation results we can conclude that the introduction of the error correction mechanism has resulted in significant improvements in the accuracy of the forecast performance for such variables as the gross domestic product (GDP) and its main components, the GDP deflator, the consumer price index, wages, and the demand for money. The purpose of this article is to present the revised 1990 version of the ERC econometric forecasting model of the Hong Kong economy and to study the properties of the model as revealed by dynamic multiplier analysis for a set of policy simulations.