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Ireland in EMU - More Shocks, Less Insulation?

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  • Patrick Honohan

    (The World Bank and CEPR)

  • Anthony J. Leddin

    (University of Limerick)

Abstract

Despite anchoring the Irish monetary system to a common zone-wide exchange rate and interest rate, EMU has triggered sizeable exchange rate and especially interest rate shocks to the Irish economy (albeit not appreciably greater than those experienced under previous exchange rate regimes). Interest rate movements have deviated widely from what a standard Taylor monetary policy rule would have counselled – though here again the deviations have been no worse in this regard than those of the previous regime. The most important shock has been associated with the large and sustained initial fall in nominal interest rates as EMU began. Through mechanisms which we formally model, the interest rate fall has had a lasting effect on property prices, construction activity and the capacity of the labour market to absorb sizeable net immigration, despite a sharp deterioration in wage competitiveness since 2002. As the long drawn-out impact of this shock subsides, the failure of the wage-bargaining system promptly to claw back the loss of competitiveness resulting from exogenous exchange rate movements is increasingly likely to show up in weaker aggregate employment performance.

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Bibliographic Info

Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 37 (2006)
Issue (Month): 2 ()
Pages: 263-294

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Handle: RePEc:eso:journl:v:37:y:2006:i:2:p:263-294

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References

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Citations

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Cited by:
  1. Theodoros S. Papaspyrou, 2007. "Economic Policy in EMU: Community Framework and National Strategies – focus on Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 04, Hellenic Observatory, LSE.
  2. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Seppo Honkapohja & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2007. "Chapter 2: Macroeonomic adjustment in the euro area – the cases of Ireland and Italy," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 59-72, 02.
  3. Lane, Philip R., 2009. "A New Fiscal Strategy for Ireland," The Economic and Social Review, Economic and Social Studies, vol. 40(2), pages 233–253.
  4. Honohan, Patrick & Leddin, Anthony J, 2005. "Ireland in EMU: More Shocks, Less Insulation?," CEPR Discussion Papers 5349, C.E.P.R. Discussion Papers.
  5. Lane, Philip R., 2006. "The Real Effects of EMU," CEPR Discussion Papers 5536, C.E.P.R. Discussion Papers.
  6. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," National Bank of Poland Working Papers 54, National Bank of Poland, Economic Institute.
  7. Honohan, Patrick, 2009. "Resolving Ireland’s Banking Crisis," The Economic and Social Review, Economic and Social Studies, vol. 40(2), pages 207–231.
  8. Traistaru-Siedschlag, Iulia, 2007. "Macroeconomic Adjustment in Ireland under the EMU," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2007(1-Spring), pages 78-92.

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