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

  • Birmingham, Colin

    (Central Bank of Ireland)

  • Conefrey, Thomas

    (Central Bank of Ireland)

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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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
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Handle: RePEc:cbi:wpaper:10/rt/11
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  1. 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.
  2. Kelly, Robert & McQuinn, Kieran & Stuart, Rebecca, 2011. "Exploring the Steady-State Relationship between Credit and GDP for a Small Open Economy - The Case of Ireland," Research Technical Papers 1/RT/11, Central Bank of Ireland.
  3. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
  4. Barrett, Alan & Kearney, Ide & Goggin, Jean & Conefrey, Thomas, 2009. "Quarterly Economic Commentary, Winter 2009," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20094, December.
  5. 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.
  6. Barrett, Alan & Kearney, Ide & Goggin, Jean, 2009. "Quarterly Economic Commentary, Summer 2009," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20092, December.
  7. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
  8. 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.
  9. Lydon, Reamonn & McCarthy, Yvonne, 2011. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," Research Technical Papers 14/RT/11, Central Bank of Ireland.
  10. 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, December.
  11. Barrett, Alan & Kearney, Ide & Goggin, Jean & Conefrey, Thomas, 2010. "Quarterly Economic Commentary, Summer 2010," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20102, December.
  12. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  13. 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.
  14. Durkan, Joe & O'Sullivan, Cormac, 2011. "Quarterly Economic Commentary, Spring 2011," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20111, December.
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