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On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?

  • Kelly, Robert

    (Central Bank of Ireland)

  • McQuinn, Kieran

    (Central Bank of Ireland)

Recently, some notable contributions suggest, that discretionary fiscal policy can be an effective and self- financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears. Loan loss forecasts over the period 2012-2014 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-á-vis its main financial institutions, may have significant implications for the fiscal multiplier.

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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 01/RT/13.

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Date of creation: Mar 2013
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Handle: RePEc:cbi:wpaper:01/rt/13
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  1. Kelly, Robert, 2011. "The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market," Research Technical Papers 13/RT/11, Central Bank of Ireland.
  2. Gerlach, Stefan & Peng, Wensheng, 2005. "Bank lending and property prices in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 461-481, February.
  3. Benetrix, Agustin & Lane, Philip R., 2009. "The Impact of Fiscal Shocks on the Irish Economy," The Economic and Social Review, Economic and Social Studies, vol. 40(4), pages 407-434.
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  6. 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.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Conefrey, Thomas & Fitz Gerald, John D., 2011. "The macro-economic impact of changing the rate of corporation tax," Economic Modelling, Elsevier, vol. 28(3), pages 991-999, May.
  9. Trevor Fitzpatrick & Kieran Mcquinn, 2007. "House Prices And Mortgage Credit: Empirical Evidence For Ireland," Manchester School, University of Manchester, vol. 75(1), pages 82-103, 01.
  10. 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, December.
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  12. Pau Rabanal & Oriol Aspachs-Bracons, 2009. "The Drivers of Housing Cycles in Spain," IMF Working Papers 09/203, International Monetary Fund.
  13. Williams, David M, 2009. "House prices and financial liberalisation in Australia," MPRA Paper 15212, University Library of Munich, Germany.
  14. Cameron, Gavin & Muellbauer, John & Murphy, Anthony, 2006. "Was There A British House Price Bubble? Evidence From A Regional Panel," ERES eres2006_150, European Real Estate Society (ERES).
  15. Meen, Geoffrey, 2000. "Housing Cycles and Efficiency," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(2), pages 114-40, May.
  16. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
  17. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  18. Ceron, Jose A. & Suarez, Javier, 2006. "Hot and Cold Housing Markets: International Evidence," CEPR Discussion Papers 5411, C.E.P.R. Discussion Papers.
  19. Changrong Deng & Yongkai Ma & Yao-Min Chiang, 2009. "The Dynamic Behavior of Chinese Housing Prices," International Real Estate Review, Asian Real Estate Society, vol. 12(2), pages 121-134.
  20. John Curtis & John FitzGerald, 1994. "Convergence in an Open Labour Market," Papers WP045, Economic and Social Research Institute (ESRI).
  21. Bergin, Adele & Conefrey, Thomas & FitzGerald, John & Kearney, Ide, 2009. "Recovery Scenarios for Ireland," Research Series, Economic and Social Research Institute (ESRI), number RS007.
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