國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
43
Appendix C: Descriptive Analysis of Raw Data
In appendix C, we will have a brief look at the raw data, including GDP, cumulative level, trade openness, and policy weight and effectiveness to form big pictures of 17 countries.
C.1 GDP
Across all 17 countries, we observe that the biggest scale economy is Germany, following France, Italy, Spain, and Netherlands. Countries with medium-sized GDP are Belgium, Austria, Greece, Finland, Portugal and Ireland. The smallest-sized GDP countries are Slovakia, Luxemburg, Slovenia, Cyprus, Estonia, and Malta.23 During 2005Q1 to 2011Q3, we observe that all the countries have experienced economic downturn during 2009, which leads to decrease in GDP. Almost all countries have returned to its previous GDP except Greece, Ireland. This observation indicates that the economic situation in these two countries is deteriorating. Besides, although the GDP once return to previous level, Italy, Spain, and Portugal are again experiencing recession with its GDP is falling in 2011.
‧
Figure6 GDP for Main 17 Euro Zone Countries (Unit: Millions of Euro)
C.2 Cumulative Debt
24Level to GDP ratio
Before we discuss further about European Debt Crisis, we shall look at debt level across major Euro Zone countries. Figure 2 and 3 shows the cumulative debt level as proportion of GDP in each quarter across 11 countries. We can observe from the figures that debt in most countries began to elevate at a higher amount after 2008, especially for PIIGS. Debt in Greece, Ireland, and Portugal is increasing at a very fast
24 The debt here refers to general government debt.
350000
2005200620072008200920102011 Y_ITALY
2005200620072008200920102011 Y_SPAIN
2005200620072008200920102011 Y_GREECE
2005200620072008200920102011 Y_IRELAND
2005200620072008200920102011 Y_GERMANY
2005200620072008200920102011 Y_FRANCE
2005200620072008200920102011 Y_FINLAND
2005200620072008200920102011 Y_ESTONIA
2005200620072008200920102011 Y_CYPRUS
2005200620072008200920102011 Y_BELGIUM
2005200620072008200920102011 Y_AUSTRIA
2005200620072008200920102011 Y_LUXEMBOURG
2005200620072008200920102011 Y_MALTA
2005200620072008200920102011 Y_NETHERLANDS
2005200620072008200920102011 Y_SLOVAKIA
2005200620072008200920102011 Y_PORTUGAL
2005200620072008200920102011 Y_SLOVENIA
‧
Figure7 Cumulative debt/GDP in Greece, Ireland, Spain, Italy and Portugal
(Unit: Percentage Rate %)Figure8 Cumulative Debt/GDP in Other Major Euro Zone countries
(Unit: Percentage Rate %)20
2005 2006 2007 2008 2009 2010 2011 NDEBT_GREECE
2005 2006 2007 2008 2009 2010 2011 NDEBT_AUSTRIA
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
46
speed after 2008, exceeding 10% of their GDP every year. It confirms the argument that financial crisis in 2008 is one of the causes for European Sovereign debt crisis.
Among PIIGS, the highest cumulative debt level country is Greece, following Italy, Portugal, Ireland and Spain.
Debt for other countries beside PIIGS25 are worthy of taking a look. Although increasing at a much lower speed, cumulative debt level for Belgium, France and Germany are relatively high. It raises concern that the debt crisis my spread to core Euro Zone countries when the economic condition get worse in the future.
C.3 Trade Openness (Trade flow/GDP)
Next, we shall look at the trade volume relative to its GDP in each country to identify the openness and dependency on trade across Euro Zone. We define trade flow as the sum of export and import. The common trend observed from figure 4 shows most country have experienced enormous trade flow reduction during financial crisis in 2009. After a short period of recovery, the trade flow is again falling down in 2011.
However, Germany and Ireland still enjoy a certain amount of trade growth relative to its GDP. Besides, few country have higher trade flow/GDP ratio relative to other countries, including Ireland, Germany, Belgium, Austria, Netherlands. These countries exhibit high economic interaction with others, and it may result either higher dependency on others thus high contagion effect in crisis, or, higher resilience to withstand the shock because of its openness. We will discuss its influence in the following section.
25 PIIGS refers to Portugal, Italy, Ireland, Greece and Spain.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
47
Figure9 Trade Openness in Greece, Ireland, Spain, Italy and Portugal
(Unit: Percentage Rate %)Figure10 Trade Openness in Other Major Euro Zone countries
(Unit: Percentage Rate %)40 80 120 160 200
2005 2006 2007 2008 2009 2010 2011 XM_GREECE
XM_IRELAND XM_ITALY
XM_PORTUGAL XM_SPAIN
40 60 80 100 120 140 160 180
2005 2006 2007 2008 2009 2010 2011 XM_AUSTRIA
XM_BELGIUM XM_FINLAND
XM_FRANCE XM_GERMANY XM_NETHERLANDS
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
48
C.4 Monetary and Fiscal Policy: Weight and Effectiveness
Before we discuss the result of Interest- Rate-Change-to-Income Effect and provide policy suggestion, we shall look at current policy weight and effectiveness. We measure policy weight by calculating the proportion of fiscal policy to the sum of fiscal and monetary policy. We define fiscal policy as exogenous shock in IS curve which will have a change on income. According to Keynesian model the IS curve can be written as:
Consumption(C), investment (I) and import (M) are function of Y, i.e. they are endogenous variables in the function of income(Y). Only changes induced by
exogenous variable G1 and X would result in changes of income. Therefore, we define sum of government consumption expenditure change (dG1) and export change (dX) as fiscal policy.
To denote monetary policy, we use the similar rezoning. In the LM equation, real money supply (dm) is the only exogenous variable. Therefore, we define real money supply divided by income effect (Ly) as monetary policy, as stated in equation (5.1).
(5.1)
The fiscal policy weight is the proportion of fiscal policy to the sum of both policies26. Here, since the sum of fiscal and monetary policy weight is one, we only calculate fiscal policy weight. Figure 5 shows PIIGS fiscal policy weight relative to
26 Fiscal policy weight is calculated as
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
49
Figure11 Fiscal Policy Weight for PIIGS
(Unit: Percentage Rate %)Figure12 Fiscal Policy Weight for Other Major Countries (Unit: Percentage Rate %) 0.0
0.2 0.4 0.6 0.8 1.0
0.0 0.2 0.4 0.6 0.8 1.0 PUBLIC2_FINLAND
PUBLIC2_GREECE PUBLIC2_IRELAND PUBLIC2_ITALY PUBLIC2_PORTUGAL PUBLIC2_SPAIN
0.0 0.2 0.4 0.6 0.8 1.0
0.0 0.2 0.4 0.6 0.8 1.0
PUBLIC2_FINLAND
PUBLIC2_AUSTRIA PUBLIC2_BELGIUM PUBLIC2_GERMANY PUBLIC2_FRANCE
PUBLIC2_NETHERLANDS
‧
base country Finland while figure 6 shows that of other major Euro Zone countries.
Compare the two figures, we find PIIGS countries put more weight on fiscal
policy than monetary policy compared to other countries. Greece, Portugal and Spain are among the highest. It somehow reflects the large amount of government
expenditure in these deeply in debt countries. For other major Euro Zone countries, monetary and fiscal policies are scattered more equally
As for measuring policy effectiveness, we also use IS-LM curve to measure. By effectiveness we mean how much output would fluctuate due to the policy from transmission by interest rate. The elasticity of interest rate toward income, measured by inverse of IS curve, is an indicator to monetary policy effectiveness. The flatter the slope of IS curve, the more effective monetary policy will be.27 The same applied to fiscal policy, which measured by the inverse of slope of LM curve28. Because our goal is to identify output fluctuation, we take the absolute value of elasticity.
From figure, we observe that both fiscal and monetary effectiveness is
tremendously reduced after 2008, but is getting better in 2011. This may contribute to the economic depression after 2008 and a slow recovery in 2011. Among 11 countries, Ireland exhibits the greatest effectiveness of monetary as well as fiscal policy, but also the largest fluctuations. Finland, Italy, Spain also have higher fiscal policy
effectiveness compared to other countries. For monetary policy effectiveness, Greece, Spain, and Portugal are relatively higher. But the differences of both policies
effectiveness across 11 countries are becoming smaller after 2008. Comparing the two policies, though fiscal and monetary policies are both venerable to economic
recessions this time, fiscal policy are still more effective to monetary policies, and this
27 Monetary policy effectiveness is measured by
28 Fiscal policy effectiveness is measured by
‧
is more obvious for countries beside PIIGS.
Figure13 Fiscal Policy Effectiveness for Major 11 Euro Zone Countries
Figure14 Monetary Policy Effectiveness for Major 11 Euro Zone Countries
.00
2005 2006 2007 2008 2009 2010 2011
LM_GREECE
2005 2006 2007 2008 2009 2010 2011
LM_AUSTRIA
2005 2006 2007 2008 2009 2010 2011
IS2_GREECE
2005 2006 2007 2008 2009 2010 2011
IS2_AUSTRIA
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
52
Reference
Ayuso, J.,
Perez
, D., & Saurina, J. (2004). Are capital buffers pro-cyclical?: Evidence from Spanish panel data. Journal of Financial Intermediation, 13(2), 249-264.Arghyrou, M. G., & Tsoukalas, J. D. (2011). The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes. The World Economy, 34(2), 173-191.
Bayoumi, T. & Vitek, F. (2011). Spillovers from the Euro Area Sovereign Debt Crisis:
A Macroeconometric Model Based Analysis. CEPR Discussion Paper no.
8497.
Borio, C., & Zhu, H. (2011) Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, Forthcoming.
Catarineu-Rabell, E, Jackson P & Tsomocos D.P. (2005). Procyclicality and the new Basel Accord – Banks’ choice of loan rating systems. Economic Theory, 26(3):
537-57.
Diamond, D. W., & Dybvig, P. H. (1983). Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91(3), 401-419.
Farhi, E., & Tirole, J. (2012). Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. American Economic Review, 102(1), 60–93.
Heid, F. (2007). The cyclical effects of the Basel II capital requirements. Journal of
Banking & Finance, 31(12), 3885-3900.
Kashyap, A. K., & Stein, J. C. (2004). Cyclical implications of the Basel II capital standards. Federal Reserve Bank of Chicago Economic Perspectives, no 1, 18-31.8
Len-Kuo Hu. (2012). Liquidity Shock, Bank Capital Requirement and Economic
Cycle. Unpublished Working Paper, National ChengChi University, Taipei.
Holmstrom, B., & Tirole, J.(2011). Inside and outside liquidity. Cambridge, MA: The MIT Press.
Obstfeld, M. (1996). Models of currency crises with self-fulfilling features. European
Economic Review, 40(3-5), 1037-1047.
Rochet, J. C., & Tirole, J. (1996). Interbank lending and systemic risk. Journal of
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
53
Money, Credit & Banking, 28(4), 733-762.
Reinhart, C. M., & Rogoff, K. S. (2010). From financial crash to debt crisis. National
Bureau of Economic Research Working Paper Series, No. 15795.
Stolz, S., & Wedow, M. (2011). Banks
’
regulatory capital buffer and the business cycle: Evidence for Germany. Journal of Financial Stability, 7(2), 98-110.Zhu, H (2007). Capital regulation and banks’ financial decisions. International