Updated at 7.22pm: Hong Kong's economy is troubled but can cope with deflation and sustain the currency's peg to the US dollar, economist Paul Krugman said.
''I've seen crisis economies and this is not a crisis economy,'' the Princeton University professor said today.
The Government was doing all it could to counter the economic downturn but was hampered by the fixed exchange rate, which meant ''it has no monetary policy, only fiscal policy, which can only do so much''.
''Hong Kong is better able to deal with deflation than most countries,'' Mr Krugman said. ''It's got relatively flexible prices, it doesn't have a lot of foreign debt, it's not leveraged.''
Consumer prices in the SAR have been falling for three years, registering a year-on-year drop of 1.2 per cent in October. The Government said yesterday it expected the composite consumer price index to drop 1.6 per cent for the full year, lowering its forecast from 1.3 per cent previously.
Mr Krugman said deflation was not good, but was not ''a life or death issue'' for Hong Kong. ''The other currency board experiencing deflation is Argentina, and you would certainly much rather be Hong Kong than Argentina. Hong Kong can live like this for years. Argentina just hit the wall,'' he said.