Macroeconomics

A major feature of the work of the ESRI on macroeconomics has been the development of key research infrastructure in the form of economic models. The HERMES macroeconomic model was built in the late 1980s and has undergone continuing development and improvement over the subsequent twenty years. It is a tool for understanding how the Irish economy behaves – what drives it and how it is likely to respond to changing circumstances at home and abroad. It has been used as an essential tool in the ESRI’s Medium-Term Reviews. It is also widely used to look at how macroeconomic developments may affect other aspects of the economy such as energy demand, environmental impact, skills needs and housing demand. A brief guide to the model is given in the 2003 Medium-Term Review.

Over the course of 2010 research was carried out on:

(a) The macroeconomic effects of the crisis on the Irish economy:

This research considered how the economy has been affected by the crisis and the possible paths to recovery. The results of this research were published in the four Quarterly Economic Commentaries published over the course of the year. Using the HERMES model of the Irish economy, this research programme considered how different aspects of the economy were likely to behave in the medium term. The implications of this research for the Irish economy in the medium term were published in a study entitled Recovery Scenarios for Ireland: an Update.

(b) Studies on the broader EU Economy and their Implications for Ireland:

The results of a series of studies were published during 2010. The first publications considered the effects on the EU economy of the increased migration resulting from EU enlargement ("EU Enlargement and Migration: Assessing the Macroeconomic Impacts").  A second paper considered how the Spanish and Irish economies were affected by EMU membership, in particular how the housing markets were affected ("Managing Housing Bubbles in Regional Economies Under EMU: Ireland and Spain"). This paper drew conclusions on the appropriate use of fiscal policy. In December the ESRI, along with its colleagues in EUROFRAME, published a forecast for the Euro zone economy (Economic Assessment of the Euro Area: Autumn Report 2010). Work continued on perceived inflation during the EURO changeover in 2002. Finally the preliminary results of work on the EU banking sector and recovery in the EU economy was released (The Banking Sector and Recovery in the EU Economy).

• The likely medium-term impact of the crisis on the Irish economy.
• Managing regional national economies under EMU; the lessons from the last decade.
• The changing balance between services and manufacturing in the wider economy.
• The future prospects of the building and construction sector.
• The effect on competitiveness of human capital and investment in infrastructure and R&D.
• The impact of migration, investment in human capital, demographic change and institutional changes on the labour market.
• The influence of external developments on Ireland will remain a key feature of research. 
• Developing and documenting the HERMES macro-economic model of the Irish economy.