Measuring Economic Activity in the Presence of Superstar MNEs
23 Pages Posted: 29 Aug 2022
Date Written: August 20, 2022
In 2015, changes to Irish tax legislation, known as the "2015 Finance Act", coincided with a 26% annual increase in real gross domestic product. We show evidence confirming the conclusions of existing literature, which suggests that the presence of large multinational enterprises (MNEs) is likely to have distorted Irish GDP -- a measure previously considered to be a reliable proxy of domestic economic activity. Furthermore, we provide an alternative method of statistically isolating the variation in GDP growth attributable solely to domestic activity growth to infer the prevailing state of the Irish economy. Our findings imply a 21% lower level of GDP relative to the official measure recorded for 2020. We suggest that our methodology may be applied by policymakers in small open economies to improve the accuracy of growth and business cycle monitoring.
Keywords: Tax havens, multinational firms, national accounting, measurement, dynamic factor models, small open economy, intellectual property
JEL Classification: F23, C38, E01, H26, O34
Suggested Citation: Suggested Citation