Research Technical Paper: Global and Domestic Modeling of Macroeconomic Shocks - A GVAR Analysis of Ireland

A 09RT17 Global and Domestic Modeling of Macroeconomic Shocks examines the effects of large global shocks on the macroeconomy of Ireland and identifies the transmission channels through which such shocks emerge. The research employs the global vector auto-regression (GVAR) model to consider responses to five distinct shocks using quarterly data from 1980 – 2016: a US interest rate hike; a decline in UK GDP; a depreciation of UK exchange rates; a reduction in Chinese output; and a global economic slowdown. The paper also considers the shocks from the viewpoint of Ireland’s main trading partners: the euro area; the US; and the UK.

The research finds:

• Ireland is relatively more exposed to: US interest rate tightening; UK exchange rate depreciations; and UK output declines. It is relatively less exposed to a rise in global oil prices. However, for all simulated shocks the response of Irish output is consistently larger in magnitude than in the other countries under analysis.
• A shock depreciation in the Sterling-Dollar exchange rate, equivalent to a currency devaluation of 15 per cent, is estimated to see Irish output peak at an increase of 0.5 per cent after two quarters, declining to baseline levels over the next eight quarters. Ireland would be strongly affected by depreciation, with small initial declines increasing in scale within four quarters of the shock.
• A shock increase of 25 basis points to the US short-term interest rate is estimated to see Irish GDP decline by –0.56 per cent after eight quarters, with the loss estimated to be –0.6 per cent and statistically significant in the long run.
• A negative shock to UK output growth equivalent to one percentage point of GDP is estimated to cause a significant and permanent decline in Irish output growth, with a long run reduction in growth of 0.45 per cent estimated over the horizon period of forty quarters.

The views presented in Research Technical Papers are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

Research Technical Papers are published on the Central Bank’s website.