Effects of U.S. inflation on Hong Kong and Singapore

Standard theories predict that the exchange rate arrangement has important implications for the interdependency of national monetary policies and the transmission of inflation across borders. This article examines how inflation rates in two small open economies, namely Hong Kong and Singapore, interact with that in the United States. A vector error correction model is used to study the inflation dynamics. Hong Kong and Singapore inflation rates, but not the U.S. one, are found to respond to the error correction term. Compared with Singapore, the Hong Kong inflation rate is more responsive to U.S. price shocks. The different responses to U.S. price shocks are consistent with the difference in exchange rate regimes adopted by the two economies. J. Comp. Econ., September 2002, 30(3), pp. 603-619. University of California, Santa Cruz, California 95064. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.