Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-23T17:07:18.761Z Has data issue: false hasContentIssue false
  • English
  • Français

Modelling external shocks in a small open economy: the case of Ireland

Published online by Cambridge University Press:  01 January 2020

Thomas Conefrey ,
Gerard O'Reilly  and
Graeme Walsh
Graeme Walsh*
Affiliation:
Central Bank of Ireland
*
E-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The Irish economy has recovered at an impressive pace from the economic and financial crisis that lasted from 2008–12. Nonetheless, as a small open economy with some lingering vulnerabilities from the recent crisis, the economy remains heavily exposed to potential adverse shocks. In this paper, we explore the possible impact of external shocks on the Irish economy. We model the shocks in a two-stage process: first using NiGEM to estimate the impact on Ireland's key trading partners and the broader international environment and then examining the effect of these changes in the COSMO model of the Irish economy. The paper focusses on three relevant risks facing the economy: the potential for a hard Brexit, an increase in interest rates and a depreciation of the sterling euro exchange rate. Using this two-step approach allows us to demonstrate the transmission of external shocks to the Irish economy. The results help to quantify the potential impact on future growth, the labour market, public finances and the financial system of some key risks materialising.

Keywords

macroeconometric modelmodel simulationsC32C50C53
Type
Research Articles
Information
National Institute Economic Review , Volume 244 , May 2018 , pp. R56 - R63
Copyright
Copyright © 2018 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The views expressed in this paper are those of the authors and do not necessarily represent the views of the Central Bank of Ireland or the ESCB.

References

Barrell, R. and Pain, N. (1997), ‘Foreign direct investment, technological change, and economic growth within Europe’. Economic Journal, 107(445), pp. 1770–86.CrossRefGoogle Scholar
Bergin, A., Conroy, N., Garcia-Rodriguez, A., Holland, D., McInerney, N., Morgenroth, E. and Smith, D. (2017), ‘COSMO: A new COre Structural MOdel for Ireland’, Working Paper No. 553. Dublin: Economic and Social Research Institute.Google Scholar
Bergin, A., Garcia-Rodriguez, A., Morgenroth, E. and Smith, D. (2017), ‘Modelling the medium-to-long-term potential macroeconomic impact of Brexit on Ireland’, The Economic and Social Review, 48(3, Autumn), pp. 305–16.Google Scholar
Bergin, A., Morgenroth, E. and McQuinn, K. (2016), Ireland's Economic Outlook and Policy Challenges, Dublin: Economic and Social Research Institute.Google Scholar
Bergin, A., Conefrey, T., FitzGerald, J., Kearney, I. and Žnuderl, N. (2013), ‘The HERMES-13 macroeconomic model of the Irish economy’, ESRI Working Paper No. 460.Google Scholar
Central Bank of Ireland (2016), ‘Box B: The impact of Brexit on the short-term outlook’, in Central Bank Quarterly Bulletin Q3, Dublin: Central Bank of Ireland.Google Scholar
Department of Agriculture, Food and the Marine (2017), Brexit Fact Sheet – Irish Agri Food Sector – May 2017, accessed at: http://www.agriculture.gov.ie/.Google Scholar
Department of Finance (2017), Budget 2018, Dublin: Department of Finance.Google Scholar
Donnellan, T. and Hanrahan, K. (2016), Brexit: Potential Implications for the Irish Agri-Food Sector, Athenry: Teagasc.Google Scholar
Ebell, M., Hurst, I. and Warren, J. (2016), ‘Modelling the long-run economic impact of leaving the European Union’, Economic Modelling, 59, pp. 196–209.CrossRefGoogle Scholar
Ebell, M. and Warren, J. (2016), ‘The long-run economic impact of leaving the EU’, National Institute Economic Review, 236, pp. 113–43.CrossRefGoogle Scholar
Hantzsche, A. and Kara, A. (2018), ‘Box B. Our Brexit assumptions and an alternative ‘no-deal’ Brexit scenario’, National Institute Economic Review, 243, February, F14–15.Google Scholar
HM Treasury (2016), HM Treasury Analysis: The Long-term Economic Impact of EU Membership and the Alternatives, London: HM Treasury.Google Scholar
Lawless, M. and Morgenroth, E. (2016), ‘The product and sector level impact of a hard Brexit across the EU’, Working Paper No. 550, Dublin: Economic and Social Research Institute.Google Scholar
McIndoe-Calder, T. (2017), ‘Debt giveth and debt taketh away: mortgage debt burdens in Ireland’, Economic Letter EL/2017/11, Central Bank of Ireland.Google Scholar
McInerney, N. (2016), ‘A structural model of macroprudential policy and the banking sector’, mimeo.Google Scholar
O'Grady, M., Rice, J. and Walsh, G. (2017), ‘Global and domestic modeling of macroeconomic shocks: a GVAR analysis of Ireland’, Research Technical Paper 09/RT/17, Central Bank of Ireland 2017.Google Scholar
OECD (2016), ‘The economic consequences of Brexit: a taxing decision’, OECD Economic Policy Paper No. 16.Google Scholar