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

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  • Conefrey, Thomas
  • O'Reilly, Gerard
  • Walsh, Graeme

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.

Suggested Citation

  • Conefrey, Thomas & O'Reilly, Gerard & Walsh, Graeme, 2018. "Modelling external shocks in a small open economy: the case of Ireland," National Institute Economic Review, National Institute of Economic and Social Research, vol. 244, pages 56-63, May.
    • Handle: RePEc:cup:nierev:v:244:y:2018:i::p:r56-r63_15
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    Cited by:

    1. Egan, Paul & Kenny, Eoin & McQuinn, Kieran, 2022. "Increasing future housing supply: What are the implications for the Irish economy," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    2. Matija Lozej & Graeme Walsh, 2021. "Fiscal Policy Spillovers in a Monetary Union," Open Economies Review, Springer, vol. 32(5), pages 1089-1117, November.
    3. Egan, Paul & Bergin, Adele, 2023. "The impact of government spending on Ireland’s housing and residential market – Targeted vs economy-wide stimulus," Journal of Policy Modeling, Elsevier, vol. 45(3), pages 552-569.
    4. McInerney, Niall & O'Brien, Martin & Wosser, Michael & Zavalloni, Luca, 2022. "Rightsizing Bank Capital for Small, Open Economies," Research Technical Papers 4/RT/22, Central Bank of Ireland.
    5. Mattie Landman & Sanna Ojanperä & Stephen Kinsella & Neave O’Clery, 2023. "The role of relatedness and strategic linkages between domestic and MNE sectors in regional branching and resilience," The Journal of Technology Transfer, Springer, vol. 48(2), pages 515-559, April.

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