The role of economics during times of major change

In my final blog of 2025, published just a few weeks ago, I noted that we need to prepare for the unexpected. The rapid pace of change since then – not only but particularly in geopolitics – has been breath-taking.

In this blog, I outline how I see the role of the economics profession during periods of major upheaval, and how this affects the work of the Central Bank of Ireland.

Stepping up to the challenge

Having studied economics at university, I have spent my entire professional life working in institutions that provide public policy advice. I have long maintained that the raison d’être of these institutions is the belief that the state can use its powers to increase the wellbeing of its citizens.

Economics is a tool, a way of thinking, that can help address the fact that individually and collectively we have limited resources to meet our wants. However, economists are forced to make simplifying assumptions as, despite the huge progress made in data collection and computing power, the economy is too complex an object to analyse precisely.

A major lesson of the global financial crisis was the disconnect between analysis of the financial system and the wider macro economy, in addition to an overreliance on the Efficient Markets Hypothesis. This sparked a huge effort to investigate these aspects in greater detail.    

Indeed, the economics profession is becoming more diverse, willing to analyse a wider range of topics using a broader set of approaches. This is very much in the spirit of my view that economists must avoid sticking to comfortable topics and adapt their focus to the key issues of the day.  

Economists have also had to become more reactive. The pandemic is a prime example of a tail event materialising and necessitating a complete overhaul of existing work plans. These skillsets proved extremely useful in mapping out potential supports for the economy during unprecedented global lockdowns.

Doing our homework

At the Central Bank of Ireland, we serve the public interest by maintaining monetary and financial stability, while ensuring that the financial system operates in the best interests of consumers and the wider economy. A key component of this is a statutory requirement to provide analysis and comment to support national economic policy development.

We deliver on this mandate through research and analysis on a diverse set of topics. Our research agenda reflects the full breath of our responsibilities and aligns with the key themes of our strategy. This approach ensures that our policy decisions and advice – as well as our regulatory and supervisory work – are guided by evidence that supports robust decision-making.

Of course, we cannot deliver frontier thinking on every issue. Therefore, we focus our efforts on areas where we have a comparative advantage. By this I mean topics where Ireland has a unique perspective that can complement the insights provided by other parts of the Eurosystem.  

In addition to the work conducted in-house, we work directly with experts outside of the Central Bank via our research engagement programme and keep abreast of the best-in-class analytical work conducted by other organisations. We are especially well-connected with the network of euro area central banks via our participation in ECB working groups and committees. This strikes an appropriate balance between enhancing our expertise on existing issues while also maintaining flexibility to react as the global landscape evolves.

Where we do choose to direct our analytical work, we utilise the diverse range of views and skillsets at our disposal. For example, our examination of the implications of geoeconomic fragmentation (PDF 1.4MB) for the Irish economy saw contributions from a number of different experts across the Central Bank.

This coordinated approach greatly raises the value added of our analysis, facilitating a more complete set of insights spanning the micro and macroeconomic impact over the short and longer term.

Adapting to changes

As Governor of the Central Bank of Ireland, I am a member of the ECB’s Governing Council. This means that the analysis we do in Dublin also considers wider European perspectives. In this context we are witnessing momentous changes – what Mark Carney described as “a rupture, not a transition” in his recent speech – which could have significant macroeconomic consequences. Although these have yet to settle, there are some areas that change is already manifesting itself, not least in security and defence.

After decades as the primary source of European defence capabilities, the United States Administration is seeking greater burden sharing for deterrence provision. This implies a substantial change in the volume and composition of fiscal expenditure in Europe. Indeed, NATO members have agreed to spend 5% of GDP annually on defence-related expenditure by 2035.

For now, only the high-level targets are clear. There are a multitude of different ways individual countries could choose to implement these spending plans. From a Governing Council perspective, and as a monetary policymaker, this uncertainty matters. I need to weigh-up the potential effects of changes in defence spending on euro area inflation and growth. Monetary policy affects the economy after a lag, and therefore we base our interest rate decisions on medium-term projections.  

To analyse this issue, economists in the Central Bank have adapted existing model frameworks. They added features  that recognise the potential of security concerns to affect economic decision making, a fundamental aspect that is absent from our standard toolkit. This is an example of our institution adapting to changing realities (however regrettable these developments are).

While only an initial attempt to get to grips with this complex issue and making the simplifying assumptions that the spending increase is expected and proceeds as planned, the analysis provides us with some useful lessons. The most important for me is that the increase in cost pressures from the permanent reallocation of resources to defence purposes does not manifest in a rise in the consumer price index. This is because the output of this production is only available to governments: these goods are not part of household’s spending basket.

Although things may play out differently in reality, this insight flags a potential issue and allows us to consider it carefully in advance. That is the true value of such analysis, not as a forecast of what will happen, but as a laboratory to examine what could happen. Importantly, we do not confuse these stylised representations with the greater complexity of the real world.    

A call to action

As I noted recently, research enables us to respond to the challenges of operating in a complex and fast-moving environment. To do so, the role of senior leaders in public policy institutions is to create an environment whereby economists are encouraged to address the most pressing issues.

But we cannot address the multitude of emerging topics – and some longstanding ones! – on our own. We need the entire profession to step up and utilise their skills on issues that most affect the wellbeing of society.

At the Central Bank of Ireland, as I mentioned above, we have a range of programmes through which we can facilitate collaboration with external researchers. Past participants in these programmes have enabled us to boost the quality of our analysis, ultimately allowing for more informed decision making.   

I look forward to welcoming a new cohort of participants later this year, as we continue to fulfil our mandate with the best interests of the public at heart.

Gabriel Makhlouf