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http://ssrn.com/abstract=922071
 
 

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Ireland in EMU: More Shocks, Less Insulation?


Patrick Honohan


Central Bank of Ireland; Trinity College (Dublin) - Institute for International Integration Studies (IIIS); Centre for Economic Policy Research (CEPR)

Anthony J. Leddin


University of Limerick - Kemmy Business School

October 2005

IIIS Discussion Paper No. 94

Abstract:     
Despite anchoring the Irish monetary system to a common zone-wide exchange rate and interest rate, EMU has triggered sizable exchange rate and especially interest rate shocks to the Irish economy (albeit not appreciably greater than those experienced under previous exchange rate regimes). Interest rate movements have deviated widely from what a standard Taylor monetary policy rule would have counseled - though here again the deviations have been no worse in this regard than those of the previous regime. The most important shock has been associated with the large and sustained initial fall in nominal interest rates as EMU began. Through mechanisms which we formally model, the interest rate fall has had a lasting effect on property prices, construction activity and on the capacity of the labour market to absorb sizable net immigration, despite a sharp deterioration in wage competitiveness since 2002. As the long drawn-out impact of this shock subsides, the failure of the wage-bargaining system promptly to claw back the loss of competitiveness resulting from exogenous exchange rate movements is increasingly likely to show up in weaker aggregate employment performance.

Number of Pages in PDF File: 42

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Date posted: August 8, 2006  

Suggested Citation

Honohan, Patrick and Leddin, Anthony J., Ireland in EMU: More Shocks, Less Insulation? (October 2005). IIIS Discussion Paper No. 94. Available at SSRN: http://ssrn.com/abstract=922071 or http://dx.doi.org/10.2139/ssrn.922071

Contact Information

Patrick Honohan (Contact Author)
Central Bank of Ireland ( email )
P.O. Box 559
Dame Street
Dublin, 2
Ireland
Trinity College (Dublin) - Institute for International Integration Studies (IIIS)
The Sutherland Centre, Level 6, Arts Building
Trinity College
Dublin 2
Ireland
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Anthony J. Leddin
University of Limerick - Kemmy Business School ( email )
Limerick
Ireland
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