Hong Kong's New Keynesian Phillips Curve: Sticky information or sticky price?

Abstract

This paper studies the validity of Hong Kongʼs New Keynesian Phillips Curve, focusing on the sticky price and the sticky information model. Drawing on Hong Kongʼs quarterly data 1982Q1-2017Q2, we find that (a) both models can account for the cyclical movements of the observed inflation dynamics, but the sticky information model appears to be better in predictive performance; (b) the Hong Kong economy is characterized by substantial price rigidity but very low information rigidity; and (c) the sticky-information model highlights the importance of past expectations in explaining the inflation dynamics in Hong Kong.

Sticky information Phillips curve with time-varying inattention

“…Other estimates for the inattentiveness parameter in the SIPC were made: Döpke, et al (2008) estimated the SIPC for Germany, France, Italy, and the United Kingdom; Gillitzer (2016) for Australia; Reid and Du Rand (2015) for South Africa; and more recently, Hung and Kwan (2022) for Hong Kong. But, to the best of our knowledge, no empirical exercise considered the potential time-varying characteristic of this parameter highlighted in sections 2.2 and 2.3.…”

“…On the other, the state-dependent nature of inattention was welldocumented in the rational inattention literature (see, e.g., Maćkowiak and Wiederholt (2009) and Maćkowiak Matějka and Wiederholt (2021)) and in Sticky-Information models (see Reis (2006a)). Yet, previous empirical analyses of the SIPC estimated the degree of inattention as constant in time (see, e.g., Khan and Zhu (2006), Dopke et al (2008), Gillitzer (2016), and Hung and Kwan (2022)). This paper presents evidence of time variation in inattention using the SIPC model and rewrites it to account for this feature.…”