Deflation: is it really a problem; if so, what should be done?
Institution(s): The Hong Kong Centre for Economic Research
Date: May 23, 2003 (Friday)
Time: 12:00 noon - 02:00 pm
Venue: J.W. Marriott Hotel (Level 3)
Cost: HK$450 per person
Deflation was benign during the late nineteenth century, but pernicious during the Great Depression. It has been extremely troublesome in Japan of late, but seemingly not seriously damaging in China. It has prevailed in Hong Kong for the past five years, but despite the pain it may have inflicted in certain quarters, notably in relation to the property market, real GDP has expanded considerably since 1998. Therefore, deflation need not necessarily spell disaster. However, it is likely, if it persists, to lead to sub-optimal macroeconomic outcomes, in particular because nominal interest rates cannot be negative. In Hong Kong, the Financial Secretary is for the first time forecasting no prospective resumption of positive inflation in the medium term; a non-negligible risk of continuing deflation can be inferred. Meanwhile, he projects the underlying potential growth rate of the economy as 3% per annum. In such circumstances, it may be desirable to switch to an active monetary policy, designed to achieve modest positive inflation, but this would only be advisable if confidence in the new monetary order could quickly be established among markets and the international financial community. The present institutional framework within which the Hong Kong Monetary Authority operates may not be adequate to secure such confidence, and any attempts to alter the framework might prompt unhelpful speculation. Thus, Hong Kong may have little choice for the time being but to stick with the prevailing institutional relationships and its pegged exchange rate under the currency board.
Tony Latter is currently Visiting Professor in the School of Economics and Finance at The University of Hong Kong. He retired earlier this year from the Hong Kong Monetary Authority where he had, for the previous four years, been Deputy Chief Executive, responsible in particular for monetary policy and operations, economic research, payment systems and debt markets. He has also held executive directorships of the HK Mortgage Corporation, HK Note Printing Ltd., HK Interbank Clearing Ltd. and the HK Institute for Monetary Research. He was previously Deputy Secretary of Monetary Affairs in the Government of HKSAR from 1982 to 1985, at which time, was responsible for re-establishing the currency board system at 7.80. He has a masters degree in economics from Cambridge University and has written widely on central banking issues.