During the last decade, Hong Kong SAR has experienced a large increase in house prices and
credit, prompting the authorities to respond with several rounds of tightening macroprudential
rules and increasing stamp duty taxes. This paper provides a Dynamic Stochastic
General Equilibrium (DSGE) model for Hong Kong SAR and analyzes the effectiveness of
these measures, and finds that they have helped reduce house price appreciation and
household leverage. A baseline small open economy real business cycle model is extended
by including a housing sector, financial frictions, foreign demand for the domestic housing
stock, and is estimated using Bayesian methods and data for Hong Kong SAR between 1996
and 2017. The paper finds that, without these policies, house prices would have been 10.5
percent higher, and the household credit-GDP ratio 14 percent higher.
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