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Modelling external shocks in a small open economy: the case of Ireland

Published online by Cambridge University Press:  01 January 2020

Thomas Conefrey ,
Gerard O'Reilly  and
Graeme Walsh
Graeme Walsh*
Affiliation:
Central Bank of Ireland
*
E-mail: thomas.conefrey@centralbank.ie
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Abstract

The Irish economy has recovered at an impressive pace from the economic and financial crisis that lasted from 2008–12. Nonetheless, as a small open economy with some lingering vulnerabilities from the recent crisis, the economy remains heavily exposed to potential adverse shocks. In this paper, we explore the possible impact of external shocks on the Irish economy. We model the shocks in a two-stage process: first using NiGEM to estimate the impact on Ireland's key trading partners and the broader international environment and then examining the effect of these changes in the COSMO model of the Irish economy. The paper focusses on three relevant risks facing the economy: the potential for a hard Brexit, an increase in interest rates and a depreciation of the sterling euro exchange rate. Using this two-step approach allows us to demonstrate the transmission of external shocks to the Irish economy. The results help to quantify the potential impact on future growth, the labour market, public finances and the financial system of some key risks materialising.

Keywords

macroeconometric modelmodel simulationsC32C50C53
Type
Research Articles
Information
National Institute Economic Review , Volume 244 , May 2018 , pp. R56 - R63
Copyright
Copyright © 2018 National Institute of Economic and Social Research

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Footnotes

The views expressed in this paper are those of the authors and do not necessarily represent the views of the Central Bank of Ireland or the ESCB.

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