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The Irish macroeconomic response to an external shock with an application to stress testing

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  • Bermingham, Colin
  • Conefrey, Thomas

Abstract

The Irish economy has recently endured a period of turbulence as a result of the collapse of the domestic property market bubble and the onset of the global financial crisis. There are two critical vulnerabilities in the Irish economy at present. The first is the potential for sluggish economic growth due to a slowdown in external demand, which impacts on the government's ability to meet budgetary targets. The second concern relates to the financial stability of the banking system given the escalating mortgage crisis. Our results show that Irish economic growth is highly sensitive to the performance of its trading partners and any international slowdown will hinder Ireland's growth prospects. The model used suggests that the appropriate policy response is to pursue further gains in competitiveness. We estimate the impact of an external slowdown on mortgage delinquency using a new dataset on the loan books of the commercial banking sector. The results suggest that a negative one standard deviation shock to US GDP growth leads to an increase of 1600 in the number of mortgages in arrears for at least 90 days. Arrears are driven by unemployment and negative equity in the model. We discuss policies to contain the mortgage crisis by improving these intermediate target variables.

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  • Bermingham, Colin & Conefrey, Thomas, 2014. "The Irish macroeconomic response to an external shock with an application to stress testing," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 454-470.
    • Handle: RePEc:eee:jpolmo:v:36:y:2014:i:3:p:454-470
    DOI: 10.1016/j.jpolmod.2014.01.013
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    3. Daragh Clancy & Rossana Merola, 2016. "ÉIRE Mod: A DSGE Model for Ireland," The Economic and Social Review, Economic and Social Studies, vol. 47(1), pages 1-31.
    4. Ms. Mwanza Nkusu, 2013. "Boosting Competitiveness to Grow Out of Debt: Can Ireland Find a Way Back to Its Future?," IMF Working Papers 2013/035, International Monetary Fund.
    5. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.

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    More about this item

    Keywords

    Trade shock; Bayesian VAR; Stress testing;
    All these keywords.

    JEL classification:

    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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