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Ireland in EMU: More Shocks, Less Insulation?

42 Pages Posted: 8 Aug 2006  

Patrick Honohan

Trinity College Dublin - Department of Economics; Peter G. Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Anthony J. Leddin

University of Limerick - Kemmy Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

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.

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: https://ssrn.com/abstract=922071 or http://dx.doi.org/10.2139/ssrn.922071

Patrick Honohan (Contact Author)

Trinity College Dublin - Department of Economics ( email )

Dublin 2
Ireland

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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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