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The Irish Macroeconomic Response to an External Shock with an Application to Stress Testing

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Author Info

  • Birmingham, Colin

    (Central Bank of Ireland)

  • Conefrey, Thomas

    (Central Bank of Ireland)

Abstract

This paper carries out an empirical analysis of the sensitivity of the Irish economy to an unanticipated external demand shock using a Bayesian VAR model which includes a number of Irish macroeconomic variables such as GDP, unemployment and wages. A 1% increase in US GDP growth leads to an increase in Irish GDP growth of 1.3% in the model. We also assess the relative importance of demand shocks in Ireland’s other key trading partners, the UK and the euro area. The Irish GDP response to shocks in our main trading partners is roughly proportional to our export shares to these regions. We feed the results of the VAR analysis into a mortgage delinquency model to derive the implication of changes in external demand on mortgage delinquency. 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.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 10/RT/11.

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Date of creation: Oct 2011
Date of revision:
Handle: RePEc:cbi:wpaper:10/rt/11

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Related research

Keywords: Trade Shock; Bayesian VAR; Stress Testing;

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References

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  1. McCoy, Daniel & Duffy, David & Bergin, Adele & Eakins, John & MacCoille, C, 2002. "Quarterly Economic Commentary, Summer 2002," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20022, March.
  2. Castrén, Olli & Dées, Stéphane & Zaher, Fadi, 2008. "Global macro-financial shocks and expected default frequencies in the euro area," Working Paper Series 0875, European Central Bank.
  3. Robert Kelly & Kieran Mcquinn & Rebecca Stuart, 2011. "Exploring the Steady-State Relationship Between Credit and GDP for a Small Open Economy–The Case Of Ireland," The Economic and Social Review, Economic and Social Studies, vol. 42(4), pages 455–477.
  4. Durkan, Joe & O'Sullivan, Cormac, 2011. "Quarterly Economic Commentary, Spring 2011," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20111, March.
  5. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  6. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
  7. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  8. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
  9. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117–150.
  10. Barrett, Alan & Kearney, Ide & Goggin, Jean & Conefrey, Thomas, 2010. "Quarterly Economic Commentary, Summer 2010," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20102, March.
  11. Bergin, Adele & Conefrey, Thomas & FitzGerald, John & Kearney, Ide, 2010. "Recovery Scenarios for Ireland: An Update," Forecasting Report, Economic and Social Research Institute (ESRI), number jacb201051, March.
  12. Barrett, Alan & Kearney, Ide & Goggin, Jean, 2009. "Quarterly Economic Commentary, Summer 2009," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20092, March.
  13. Barrett, Alan & Kearney, Ide & Goggin, Jean & Conefrey, Thomas, 2009. "Quarterly Economic Commentary, Winter 2009," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20094, March.
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Cited by:
  1. Mwanza Nkusu, 2013. "Boosting Competitiveness to Grow Out of Debt," IMF Working Papers 13/35, International Monetary Fund.

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