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Deciphering Ireland’s Macroeconomic Imbalance Indicators: Statistical Considerations

Listed author(s):
  • Mary Cussen

    (Central Bank of Ireland)

The recent financial crisis has highlighted the importance of the early detection and correction of macroeconomic vulnerabilities. This has led the European Commission to develop the Macroeconomic Imbalance Procedure (MIP). Under the MIP, the potential vulnerabilities of EU countries are assessed using standard indicators relating to internal and external macroeconomic imbalances. These indicators, however, assume cross-country data are comparable, despite economic and financial structures being very heterogeneous. This is not the case. This paper finds that for countries with substantial international investment, such as Ireland, five of the eleven indicators are materially distorted by financial and non-financial multinational activities. This paper disaggregates these five affected indicators into multinational and indigenous Irish components, insofar as the existing data allows. It finds that for Ireland the MIP indicators underestimate some external imbalances, significantly overestimate private sector credit imbalances and underestimate the deleveraging of the financial sector. Adjusting the indicators to allow for country-specific factors can help diagnose the underlying imbalance, while reducing instances of the MIP highlighting false positives.

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

Volume (Year): 46 (2015)
Issue (Month): 2 ()
Pages: 293-313

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Handle: RePEc:eso:journl:v:46:y:2015:i:2:p:293-313
Contact details of provider: Web page: http://www.esr.ie

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  1. Karl Whelan, 2010. "Policy Lessons from Ireland’s Latest Depression," The Economic and Social Review, Economic and Social Studies, vol. 41(2), pages 225-254.
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  10. Cussen, Mary & O'Leary, Brídín, 2013. "Why are Irish Non-Financial Corporations so Indebted?," Quarterly Bulletin Articles, Central Bank of Ireland, pages 104-118, January.
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  13. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
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  16. Godfrey, Brian & Jackson, Clive, 2011. "Meeting the Statistical Challenges of Financial Innovation: Introducing New Data on Securitisation," Quarterly Bulletin Articles, Central Bank of Ireland, pages 109-122, July.
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  19. Cussen, Mary & Lucey, Mick, 2011. "Treatment of Special Bank Interventions in Irish Government Statistics," Quarterly Bulletin Articles, Central Bank of Ireland, pages 78-92, October.
  20. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
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