Browsing by Author "Funke, Michael"

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  • Funke, Michael; Strulik, Holger (2003)
    BOFIT Discussion Papers 10/2003
    Published in Published in Finnish Economic Papers vol 19, no 1 (2006), pp. 25-38
    This paper analyses the long-run effects of Estonia s 2000 Income Tax Act with a dynamic general equilibrium model.Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits.Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare.A sensitivity analysis shows the results are rather robust. Keywords: growth, welfare, taxation, tax reform, Estonia JEL Classification: H25, H32, O41, O52
  • Blagov, Boris; Funke, Michael (2014)
    BOFIT Discussion Papers 15/2014
    Published in Oxford Bulletin of Economics and Statistics, Vol. 78, 2016, pp. 895-914
    ​This paper takes seriously the idea that the coefficients of a VAR and the variance of shocks may be time-varying and so employs a Markov regime-switching VAR model to describe and analyse the time-varying credibility of Hong Kong’s currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This enables us to determine which changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We carry out extensive testing to search for the most appropriate specification of the Markov regime-switching model. We find strong evidence of regime switching behaviour that portrays the timevarying nature of credibility in the historical data. Our own conditional volatility index provides anticipatory signals and amplifies the regime-switching transition probabilities. Publication keywords: Markov regime-switching VAR, exchange rate regime credibility, Hong Kong
  • Funke, Michael; Sun, Rongrong; Zhu, Linxu (2018)
    BOFIT Discussion Papers 12/2018
    Published in Pacific Economic Review, Volume 27, Issue 3, August 2022, Pages 254–276
    Household borrowing in China has increased considerably in recent years, raising concerns about the household sector’s vulnerability and implications for the stability of the financial system. We construct a number of granular debt-burden indicators at the level of individual Chinese households and calculate the share of households that are financially vulnerable using the three available waves (2011, 2013 and 2015) of China’s Household Finance Survey. Overall loan-to-value (LTV) ratios appear safe and sound at first glance, but closer scrutiny reveals that Chinese households in the lowest income quintile face high vulnerability and struggle to meet their debt commitments. Our stress tests suggest that Chinese households in higher quintiles, despite the huge increase in house-hold indebtedness, are not particularly vulnerable to declining incomes or falling house prices.
  • Chen, Hongyi; Funke, Michael; Tsang, Andrew (2016)
    BOFIT Discussion Papers 11/2016
    ​Persistent producer price deflation in China and other Asian economies has become a genuine concern for policymakers. In June 2016, China’s producer prices were down 12.7 percent from their peak in 2011, following a 52-month stretch of consecutive negative producer price readings (March 2012 to June 2016). Given problems with overcapacity and heavy corporate debt burdens, the incessant decline in producer prices has eroded corporate profitability, dampened fixed in-vestment and depressed growth overall. This paper analyzes the determinants of producer price declines across eleven Asian economies, finding that the recent synchronous and protracted pro-ducer price deflation has been driven by weak production growth, low commodity prices, spill-over effects from China, and, to a lesser extent, exchange rate pass-through. With China at the heart of the region’s producer price deflation challenge, we consider the structural adjustments needed in China to cope with the decline and head off deflationary threats.
  • Funke, Michael; Tsang, Andrew (2019)
    BOFIT Discussion Papers 8/2019
    Revised data uploaded on 8th November 2019. Published in Economic Record, Vol. 97, No. 316, March, 2021, 100–122.
    The recent upgrade of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.
  • Chen, Xi; Funke, Michael (2012)
    BOFIT Discussion Papers 13/2012
    Published in Journal of Macroeconomics, Volume 38, Part B, December 2013, Pages 465-480
    This paper accounts for China.s economic growth since 1980 in a unified endogenous growth model in which a sequencing of physical capital accumulation, human capital ac-cumulation and innovation drives the rise in China.s aggregate income. The first stage is characterized by physical capital accumulation. The second stage includes both physical and human capital accumulation, and in the final stage innovation is added to the mix. Model calibrations indicate that the growth model can generate a trajectory that accords well with the different stages of development in China. Keywords: China, economic growth, transitional dynamics JEL-Classification: D90, O31, O33, O41
  • Funke, Michael; Yu, Hao (2010)
    BOFIT Discussion Papers 11/2010
    Published in China Economic Review, 22 (2011) 196-209.
    Seaports have historically played a key role in facilitating trade and growth. This paper is the first attempt in the literature to analyse the formation of Chinese seaport cities and the dynamics that drives it. First, we aim to identify theoretically the emergence of urbanized seaports with the help of a formal economic geography model. Second, employing an empirically plausible parameterisation of the model, we calibrate the evolutionary process and spatial distribution of seaports along the Chinese coastline.
  • Funke, Michael; Loermann, Julius; Tsang, Andrew (2017)
    BOFIT Discussion Papers 15/2017
    In line with the deepening of the derivative foreign-exchange market in Hong Kong, we recover risk-neutral probability densities for future US dollar/offshore renminbi exchange rates as implied by exchange rate option prices. The risk-neutral densities (RND) approach is shown to be useful in analyzing market sentiment and risk aversion in the renminbi market. We include a forecasting exercise that confirms market participants were able to forecast the shape of the actual densities correctly for short horizons, even if their exact location could not be determined.
  • Funke, Michael; Tsang, Andrew (2020)
    BOFIT Discussion Papers 12/2020
    Published in Economic Modelling 2020 ; 93 ; December ; pp. 465-473
    The People’s Bank of China (PBoC) has taken numerous measures to cushion the impacts of the COVID-19 health crisis on the Chinese economy. As the current monetary policy framework features a multi-instrument mix of liquidity tools and pricing signals, we employ a dynamic-factor modeling approach to derive an indicator of China’s monetary policy stance. Our approach assumes that comovements of several monetary policy instruments share a common element that can be captured by an underlying unobserved component. We use the derived indicator to trace the response of the PBoC to the coronavirus pandemic. The estimates reveal that the PBoC has implement novel policy measures to ensure that commercial banks maintain liquidity access and credit provision during the COVID-19 crisis.
  • Funke, Michael; Zhong, Doudou (2020)
    BOFIT Discussion Papers 19/2020
    The political hyperglobalisation trilemma asserts that a government cannot simultaneously opt for deep international integration, national sovereignty and democratic politics, but rather is constrained to choosing two of the three at most. This paper presents a new and comprehensive cross-country panel dataset operationalising the multifaceted three vertices of the trilemma. After an explorative data analysis, we employ panel error-correction techniques to uncover the mutual interdependencies among the variables in the system. The econometric evidence supports the existence of a long‐run relationship between economic integration, national sovereignty and democratic politics as postulated in the political globalisation trilemma.
  • Blagov, Boris; Funke, Michael (2013)
    BOFIT Discussion Papers 24/2013
    Published in Macroeconomic Dynamics, Vol 23, No 6 (2019), pp. 2434-2468
    An estimated Markov-switching DSGE modelling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong's linked exchange rate system. The model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. These findings contribute to efforts at modelling exchange rate regime credibility as a non-linear process with two distinct regimes. Keywords: Markov-switching DSGE models, exchange rate regime credibility, Hong Kong. JEL-Classification: E32, F41, C51, C52
  • Funke, Michael; Gronwald, Marc (2007)
    BOFIT Discussion Papers 20/2007
    Published in The World Economy, Volume 31, Issue 12, pp. 1581-1598, Dec 2008
    On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD ex-change rate will likely be about 7.42 RMB/USD in summer/autumn 2008. Keywords: China, renminbi, de facto exchange rate regime, TV-AR model, TV-AR-GARCH model JEL-Classification: C22, F31, F37
  • Funke, Michael; Wende, Adrian (2022)
    BOFIT Discussion Papers 1/2022
    In light of the recent tit-for-tat trade dispute between China and the US, interest in quantifying the effects of the so-called phase one agreement has risen. To this end, the paper quantifies the impact of the asymmetric managed trade agreement using a multi-country open-economy dynamic general quilibrium model. Besides assessing the direct implications for China and the US, trade diversion effects are also analyzed. The model-based analysis finds noticeable positive (negative) impacts of the agreement for the US (China) as well as negative spillover effects for countries not directly affected by the managed trade deal due to trade diversion. The impact of possible future trade agreements is also examined.
  • Chen, Hongyi; Funke, Michael; Lozev, Ivan; Tsang, Andrew (2017)
    BOFIT Discussion Papers 3/2017
    Published in International Journal of Central Banking, IJCB, Vol. 16, No. 5, October 2020, pp. 49–94
    This paper discusses the macroeconomic effects of China’s informal banking regulatory tool “win-dow guidance,” introduced in 1998. Using an open-economy DSGE model that includes the com-mercial banking sector, we study the stabilizing effects of this non-standard quantitative monetary policy tool and the implications of quantity-based vs. price-based monetary policy instruments for welfare. The analyses are relevant to the current overhaul of Chinese monetary policy.
  • Funke, Michael; Mehrotra, Aaron; Yu, Hao (2011)
    BOFIT Discussion Papers 35/2011
    Published in Empirical Economics, Volume 48, Issue 4, June 2015: 1619-1641
    With recovery from the global financial crisis in 2009 and 2010, inflation emerged as a major concern for many central banks in emerging Asia. We use data observed at mixed frequencies to estimate the movement of Chinese headline inflation within the framework of a state-space model, and then take the estimated indicator to nowcast Chinese CPI inflation. The importance of forward-looking and high-frequency variables in tracking inflation dynamics is highlighted and the policy implications discussed. Keywords: Nowcasting, CPI inflation cycle, mixed-frequency modelling, dynamic factor model, China. JEL classification: C53, E31, E37
  • Funke, Michael; Ruhwedel, Ralf (2003)
    BOFIT Discussion Papers 17/2003
    Published in China Economic Journal, 2008, Volume 1 (2): 203-212
    We calculate welfare gains of trade liberalization in the Central and East European transition economies, following the approach of Romer (1994), who emphasized that proper modeling of the impact of trade restrictions on the number of available product varieties is crucial to quantifying the welfare impact of trade liberalization. The empirical work relies on direct measures of product variety calculated from 5-digit trade data.Although the issue is far from settled, the emerging conclusion is that freer trade has boosted welfare. Trade Liberalization, Product Variety, Welfare, Transition Economies D60, F14, F15
  • Funke, Michael; Loermann, Julius; Tsang, Andrew (2020)
    BOFIT Discussion Papers 22/2020
    Published in Review of International Economics, Vol. 30, 2022, 606–628
    We analyse volatility spillovers between the on- and offshore (CNY and CNH) Renminbi exchange rates towards the US dollar (USD). The volatility impulse response (VIRF) methodology introduced by Hafner and Herwatz (2006) is applied to several shocks between January 2012 and December 2019. Furthermore, we propose a novel way of estimating VIRFs based on Bayesian estimation of the MV-GARCH BEKK model. A simple Independence Chain Metropolis-Hastings algorithm allows drawing VIRFs in an efficient manner, allowing to analyse the significance and persistence of volatility shocks and associated volatility spillovers. The VIRF results show that the CNH exchange rate promptly reflects the global market demand and supply, while the CNY exchange rate reacts with a time lag. The VIRF results also show the existence of spillovers between the two markets as the co-volatility increases in response to shocks.
  • Colavecchio, Roberta; Funke, Michael (2006)
    BOFIT Discussion Papers 16/2006
    Published in China Economic Review 19 (2008) 635-648
    This paper uses multivariate GARCH techniques to study volatility spillovers between the Chinese non-deliverable forward market and seven of its Asia-Pacific counterparts over the period January 1998 to March 2005.To account for the time-variability of conditional correlation, a dynamic correlation structure is included in the volatility model specification.The empirical results demonstrate that the renminbi non-deliverable forward (NDF) has been a driver of various Asian currency markets but that such co-movements exhibit a substantial degree of heterogeneity.As to the determinants of the magnitude of these comovements, we test the relevance of potential factors and find that it is the degree of real and financial integration, in particular, that exerts the largest influence on volatility transmission. Keywords: China, renminbi, Asia, forward exchange rates, non-deliverable forward market, multivariate GARCH models JEL-Classification: C22, F31, F36
  • Colavecchio, Roberta; Funke, Michael (2007)
    BOFIT Discussion Papers 17/2007
    Published in Journal of Asian Economics, Vol. 20, No. 2, March 2009 as "Volatility dependence across Asia-Pacific onshore and offshore currency forwards markets"
    This paper estimates switching autoregressive conditional heteroscedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China's U.S. dollar future rates upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes. Keywords: China, renminbi, Asia, forward exchange rates, non-deliverable forward market, SWARCH models JEL-Classification: C22, F31, F36
  • Funke, Michael; Paetz, Michael (2010)
    BOFIT Discussion Papers 19/2010
    Published also in Journal of Housing Economics, Volume 22, Issue 1, March 2013, Pages 62-76 as "Housing prices and the business cycle: An empirical application to Hong Kong".
    This paper develops an open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. The results show that Hong Kong s housing market is quite open to foreign investment, and perhaps more significantly, that variations in the loan-to-value ratio and housing preference shocks largely explain business cycle volatility.