2. Literature Review
6.1 The Unit Root Test
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6 Panel Data Estimation
6.1 The Unit Root Test
To find whether there are common factors in each countries influencing Interest- Rate-Change-to-Income Effect, we construct panel data estimation. The estimation equation goes as follows:
Interest- Rate-Change-to-Income Effect= Intercept+ Monetary Policy Effectiveness+ Fiscal Policy Effectiveness+ Trade Openness+ Fiscal Policy Weight + Debt Flow (6.1)
All the variables are stated before, except for debt flow. Instead of cumulative debt level, we use debt increase in every quarter as variable to see whether the debt increase level across countries have common influence on Interest-
Rate-Change-to-Income Effect.
Before constructing the panel data, we should perform unit root test. Table 1 shows the statistic and p-value of Argumented Dickey Fuller test, Phillip-Pearson Test, and Breitung-T Test. The result shows that all variables, except monetary policy
effectiveness and fiscal policy effectiveness, are stationary. After first differencing Monetary Policy Effectiveness and Fiscal Policy Effectiveness, the two variables become stationary. In the following sections, our result will be presented in both estimation before first differencing and estimation after first differencing.
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Table2 Unit Root Test Result for variables in (6.1)
The Unit Root TestSample: from 2005Q2 to 2011Q3
ADF PP Breitung t-stat
Statistic P-Value Statistic P-Value Statistic P-Value
Interest-rate-change-to
-income effect16 240.901 0.0000* 269.874 0.0000* -5.18864 0.0000*
Monetary Policy
Effectiveness17 22.6953 0.9303 12.7478 0.9997 -2.37752 0.0087*
Fiscal Policy
Effectiveness18 24.2809 0.8909 12.764 0.9996 -2.62222 0.0044*
Trade openness19 65.3137 0.0010* 47.274 0.0647 -3.29405 0.0005*
Fiscal policy weight20 231.007 0.0000* 278.715 0.0000* -8.23047 0.0000*
Debt flow21 212.311 0.0000* 278.154 0.0000* -6.76618 0.0000*
6.2 Panel Data Analysis
Table 2 is the original panel data result of (6.1) before we take care of the unit root issues. Because we have identified Fiscal and Monetary Policy Effectiveness might not be stationary variables, we present first differencing result in table 3. Therefore, our interpretations below follow the first difference adjustment result in Table 3.
We construct our estimation by splitting countries into three groups. First, we pool all 17 countries together, with 398 samples. According to our previous results, most countries have positive Interest- Rate-Change-to-Income Effect. Under the
w16 As stated in (4.6), Interest-Rate-Change-to-Income Effect is defined as how much unit of income (Y) will be affected by a unit change in interest rate (Rf).
17 Monetary policy effectiveness is the elasticity of IS, calculated as
19 Trade openness is the proportion of the sum of import and export to GDP.
20 Fiscal policy weight is calculated as
.
21 Debt flow is the proportion of additional increase of debt in the calculated quarter to GDP.
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assumption of procyclicality capital requirement, the significance of trade flow indicates that countries with high trade flow relative to its GDP are tend to require larger adjustment to its capital requirement rule. To think intuitively, high trade-flow countries have higher dependency on other countries, thus the economic situation is more relative to others, especially in crisis. In order to prevent the spillover effects, more flexible capital requirement is needed22. In the second column, we have excluded six small countries which we consider extreme values, including Cyprus, Estonia, Luxemburg, Malta, Slovakia, and Slovenia. The results are similar with the previous panel, indicating that extreme values in the 6 small countries do not affect the overall trend of our data. Finally, we pool only the 5 in-debt countries, including Greece, Ireland, Spain, Portugal and Italy. The significance of expansionary policy weight and effectiveness shows under pro-cyclical capital requirement, the more weight and more effective fiscal policy is, the less capital requirement adjustment needed. In some point, this can be linked to the fact that countries with more
government expenditure should loosen capital requirements during recession but has an upper limit, i.e. the degree of loosen capital regulation should not be out of control, preventing these countries to go into further break down. Besides, though not obvious in other countries, debt flow is significant when we pool the 5 countries together. The result indicates the higher the debt level, the higher level of capital requirement adjustment is needed. Last but not the least, the trade openness is not significant in these 5 countries. We interpret it as though trade openness play a part in determining capital requirement policy, other indicators, such as debt increase level in PIIGS countries have dominated trade openness. Therefore, for PIIGS, the capital requirement policy should be adjusted depending on the fiscal policy weight and
22 For more detailed explanation to the relation between Interest-Rate-Change-to-Income-Effect, see footnote 15.
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effectiveness, debt increase level in each quarter.
Table3 Panel Estimation Result for Variables in (6.1) Before First differencing
Dependant Variable:Interest-Rate-Change- to-Income Effect Sample: from 2005Q2 to
2011Q3
All 17 countries excluding 6 small countries
5 in-debt countries
Coefficient P-Value Coefficient P-Value Coefficient P-Value
Monetary Policy Effectiveness
-235984.5 0.1572 -84754.8 0.0091* -98499.8 0.0000*
Fiscal Policy Effectiveness 1902.619 0.0094* 90630.28 0.0060* 120275.7 0.0000*
Trade Openness -52.16518 0.0001* -61.3473 0.0028* -51.743 0.0031*
Fiscal Policy Weight -2637.831 0.2653 -2267.12 0.4789 5292.276 0.0353*
Debt Flow -7194.699 0.2856 -7623.28 0.3542 -8538.43 0.1958
Samples 398 276 128
R-square 0.046948 0.061236 0.253382
Adjusted R-square 0.037293 0.043851 0.22271
F-Statistic Probabilities 0.001281 0.004214 0.000001
Table4 Panel Estimation Result for Variables in (6.1) After First differencing
Dependant Variable:Interest-Rate-Change- to-Income Effect Sample: from 2005Q2 to
2011Q3
All 17 countries excluding 6 small countries
5 in-debt countries
Coefficient P-Value Coefficient P-Value Coefficient P-Value
Monetary Policy Effectiveness
24143.14 0.6974 -154187.3 0.2980 -215478.2 0.0932
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Dependant Variable:
Interest-Rate-Change- to-Income Effect Sample: from 2005Q2 to
2011Q3
All 17 countries excluding 6 small countries
5 in-debt countries
Coefficient P-Value Coefficient P-Value Coefficient P-Value
Fiscal Policy Effectiveness 2458.784 0.4181 163814.3 0.1781 223308.8 0.0620*
Trade Openness -18.2393 0.0550* -43.06878 0.0129* -17.19854 0.2970 Debt Flow -6341.946 0.3060 -7000.504 0.3278 -15316.68 0.0308*
Samples 398 276 128
R-square 0.046948 0.061236 0.126240
Adjusted R-square 0.037293 0.043851 0.0889
F-Statistic Probabilities 0.001281 0.004214 0.000001
6.3 Forecasting and Future Policy Suggestion
In this section, we want to use the estimation result in previous section to forecast Interest- Rate-Change-to-Income Effect in 2012. We present the forecast result before first differencing in figure 4 and after first differencing in figure 5. Our result shows that most countries exhibit positive Interest- Rate-Change-to-Income Effect. After dealing with unit root by first differencing, Interest- Rate-Change-to-Income Effects in all the countries are positive. This indicates that in 2012, where the European Sovereign debt crisis deepens, counter-cyclical capital requirement should be adopted.
Countries with decreasing GDP need loose capital requirement to inject revival to their economy. This is especially true in PIIGS countries. According to our previous analysis, the higher the value of Interest- Rate-Change-to-Income Effects, the less capital requirement adjustment needed to make. Observing from figure 4 and figure 5,
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we find that among PIIGS, Greece, Italy, Spain and Portugal all have relative high value of Interest- Rate-Change-to-Income Effect. We conclude that instead of austerity measure, the authority should adopt counter-cyclical capital requirement.
When recessions occur, the authority should loosen capital requirement but still holds an upper-limit to prevent further break down. This also applies to other major Euro Zone countries, such as Germany and France. However, for Ireland the result is different. It still shows Ireland need to loosen capital requirement in 2012 since it has encountered economic recession, and the lower value of Interest-Rate-to-Income Effect means Ireland should further decrease capital requirement since its GDP has declined in 2012.
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Figure4 Forecast of 2012 Interest-Rate-Change-to-Income-Effect Before First differencing
Figure5 Forecast of 2012 Interest-Rate-Change-to-Income-Effect After First differencing
Ireland Slovakia Malta Estonia Luxembo
urg Slovenia Belgium Netherla
nds Austria Germany Finland Spain Greece Italy Portugal France h' -3773 -1066.5 -729.57 -2.9036 158.961 197.317 740.242 976.898 3013.54 3976.04 4445.31 4528.73 4779.16 5629.5 5906.27 6582.82 -6000
-4000 -2000 0 2000 4000 6000 8000
Forecast 2012 Interest-Rate-to-Income-Effect(1)
Malta Slovakia Ireland Estonia Netherla
nds Belgium Slovenia Austria Germany Finland Spain Italy France Greece Portugal Luxembo urg H' 1528.17 1880 1988.25 2088.41 2384.83 2505.36 2614.67 3037.4 3515.5 3678.23 4061.09 4070.53 4355.53 4378.56 4789.91 5721.76 0
1000 2000 3000 4000 5000 6000 7000
Forecast 2012 Interest-Rate-to-Income-Effect(2)
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7 Conclusion
In this paper, we followed the framework of Len-Kuo Hu (2012) to derive capital requirement strategies. Depending on interaction with liquidity shock, the loan’s project’s return, and the moral hazard problem, we derive the optimal capital requirement function, which determines on general economic condition in each country. Our model suggests that counter-cyclical capital requirement should be adopted when a country’s GDP is negatively related with its interest rate. On the contrary, the government should implement a pro-cyclical capital requirement policy when a country’s GDP is positively related with its interest rate. With Keynesian's IS-LM framework, we are able to further specify how to identify whether capital requirement should increase or decrease as GDP changes.
We use the result of our model to test the optimal capital requirement strategies under the theme of ongoing European debt crisis. Our results can be summarized as following. First, among the 17 countries across Euro Zone, most countries exhibit positive relation between GDP and interest rate during 2005Q2 to 2011Q3, indicating counter-cyclical capital requirement strategies should be adopted. Besides, in 2011, GDP in Greece, Ireland, Italy, Spain and Portugal are declining, meaning that these countries need loose capital requirement to foster its economic demands. The austerity measure will only worsen the already weak economic condition. Third, by
constructing panel data, the result indicates that under the counter-cyclical capital requirement strategies, countries involved with higher trade are required to adopt more flexible capital requirement policy. When we only estimate PIIGS countries, the result shows that debt increase, fiscal policy weight and effectiveness dominate Interest- Rate-Change-to-Income Effects. Finally, when we use our data and equation
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estimation result to forecast Interest- Rate-Change-to-Income Effects in 2012, we find all 17 Euro Zone countries should adopt counter-cyclical capital requirement policies.
In addition, Greece, Italy, Portugal, France, and Spain are the countries needed to have an upper-limit when loosen capital requirement is adopted.
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Appendix A: Detail Definition of Variables
Variables Definition
C Household final consumption
expenditure
Consists of expenditure incurred by residents household on individual consumption of goods and services, household payment to the product provided by the government. It also includes various kinds of imputed expenditure of which the imputed rent for services of owner-occupied housing (imputed rents). Household final consumption includes household expenditure made on the domestic territory by residents and inbound tourists, but excludes residents' expenditure made abroad.
I Gross Capital Formation
(GFCF)
Gross Capital Formation consists of outlays on addition to the fixed assets of an economy and net changes in
inventories. Fixed asset includes land improvements, plant, machinery, equipment purchase, construction of the roads, railways, schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings.
Inventories are stocks of goods held by firms to meet
temporary or unexpected fluctuations in production or sales.
Net acquisitions of valuables are also considered capital formation.
G1 Government final consumption
expenditure (GFCE)
Government expenditure on goods and services that are used for the direct satisfaction of individual needs
(individual consumption) or collective needs of members of the community (collective consumption).
It mainly consists of the current expenditure, which is the sum of service and goods purchased by government, social payments and compensation to government employees.
G2 Total expenditure The sum of current expenditure and capital expenditure.
1. Current expenditure
The sum of compensation to government employees, the service and goods purchased by government, interests, social payments (social benefits and pensions paid in
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money, and service funded by government that are
produced and delivered to household by market units), and subsidies.
2. Capital expenditure
The sum of government investment which deals with the acquisition of fixed capital asset, capital transfers, acquisition of stocks, valuable lands less the disposal of such asset.
T Tax Sum of current revenue and capital revenue.
1. Current revenue
The sum of direct taxes payable by household and cooperation, indirect taxes which received by EU institutions, social contributions of employers and
employees, sales which includes output for own final use as well as actual receipts from the sale of goods and services by government units, receives of other current transfers.
2. Capital revenue
The sum of capital taxes, investment grants and other capital transfers.
X Exports of goods and service
Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services.
They exclude compensation of employees, investment income and transfer payments.
M Imports of goods and service
Imports of goods consists the value of all goods and other market services received from the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial,
information, business, personal, and government services.
They exclude compensation of employees, investment income and transfer payments
M2 Money Supply M2 is defined as M1, which is the sum of currency in circulation and overnight deposit, plus deposits with an agreed maturity up to 2 years, and Deposits redeemable at a
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period of notice up to 3 months.
P Harmonized Consumer Price
Index(HICP)
Each country in European Union computes some 80 prescribed sub-indices, and their weighted average constitutes the national HICP. All countries uses 2005 as base period.
Rf 3-month
Interbank rate
The rate of interest rate charged on 3-month loans between banks.
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Appendix B: Value of Interest-Rate-to-Income Effect in 17 Euro Zone Country
Greece Italy Spain Portuga
l Ireland France Germa
ny Belgiu
m Austia Finland Netherl
ands Cyprus Estonia Luxem
burg Melta Slovakia Slovenia
958 -3461 4204 273 5430 2723 113432 69 -352 1737 7806 -50 NA -46703 -10 NA 155 2005Q2
-717 2993 4753 197 1196 3889 16285 -176 1506 1175 310 -27 NA 1207 -25 NA 234 2005Q3
1077 14541 4254 -3665 1637 1227 6292 411 1285 574 -831 -60 NA 2829 -6 NA 152 2005Q4
774 8375 4803 -602 857 3438 -2624 732 -226 -10703 18743 125 NA 823 -21 NA 401 2006Q1
938 12196 3743 310 1517 2556 111535 47 -153 -167 5521 0 NA -141 -8 -1292 261 2006Q2
632 16199 5081 422 1279 6425 12664 178 1164 1198 626 -18 NA 388 -34 2453 414 2006Q3
1167 19167 4131 -83 1833 1226 9702 811 693 779 -103 -125 NA 829 0 -211 51 2006Q4
647 13855 4953 -118 2078 10189 5440 655 203 1453 162 176 NA 93165 -6 -5591 218 2007Q1
946 54718 4086 -232 1540 2790 -1571 92 -179 -25205 983 359 NA -1936 -16 264 192 2007Q2
501 192 4906 250 1060 6257 -10365 -334 -25 981 512 -22 NA 271 26 2094 119 2007Q3
1181 43149 4512 30162 2094 1632 71062 -336 1652 -382 721 -68 NA -822 -8 -34368 196 2007Q4
701 10430 4917 472 1742 3589 -441 -304 290 956 617 NA NA 484 12 431 231 2008Q1
910 9732 4221 338 1614 4017 2635 -887 902 3947 -347 NA 15 65 -2 1232 232 2008Q2
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8386 9925 5083 242 1908 25365 -1221 -313 414 842 230 NA 103 78 -17 439 167 2008Q3
1069 -8818 3970 185 941 2517 5299 -805 218 8254 636 NA 49 548 -15 398 212 2008Q4
559 7432 4824 397 1586 -1646 7491 -660 538 1158 1305 NA 30 2154 -27 434 219 2009Q1
1047 269 4577 300 1956 4254 -51267 -302 3730 1037 -16 NA 52 2573 -8 529 320 2009Q2
767 -3264 4495 -1804 1848 5717 9127 -448 387 1200 966 NA -20 -810 -15 379 3 2009Q3
438 26794 4780 296 1877 738 4730 -437 457 997 893 NA 55 4163 -9 732 220 2009Q4
1276 14112 4321 -1888 1941 3022 67982 1531 -1182 994 869 NA 32 -95 -13 -951 244 2010Q1
3707 8042 4633 288 1836 2245 45091 -742 636 859 1724 NA 23 -704 -14 801 170 2010Q2
1718 2426 4482 265 1806 15359 14442 652 938 1247 629 NA 65 -1105 -14 709 415 2010Q3
519 8662 4706 -316 571 -13 4952 -235 386 837 936 NA 21 -803 -7 2083 239 2010Q4
962 13442 4481 118 1797 NA NA -494 -1947 854 275 NA 71 203 -17 111 226 2011Q1
NA 4356 4812 361 1660 NA NA 361 716 1408 4925 NA 27 16416 -9 276 221 2011Q2
NA 1546 3605 381 1746 NA NA 116 1767 833 972 NA -53 132 7 468 -593 2011Q3
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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.
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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
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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
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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.
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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
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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
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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
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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
27 Monetary policy effectiveness is measured by