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A major feature of the work of the macroeconomic division in the ESRI over many years has been the development and maintenance of a suite of economic models. This suite of models is used extensively in a range of studies on medium-term macroeconomic forecasting and policy analysis. They have also been used to inform studies of other aspects of the economy such as energy demand, environmental impact, skills needs, and housing demand. The results of this modelling work are also used to inform the short-term forecasting work underlying the Quarterly Economic Commentary.
One of the key modelling tools used for this purpose is the ESRI’s HERMES macro-economic model of the Irish economy ("The ESRI Medium-Term Economic Model"). It is the only complete structural model of the Irish economy in regular use today. The HERMES model was first developed in the late 1980s and has undergone continuing development and improvement in subsequent years. Recent papers incorporating the results of this research include: "The Macro-economic Impact of Changing the Rate of Corporation Tax" and "The Impact of a Carbon Tax on Economic Growth and Carbon Dioxide Emissions in Ireland". In conjunction with the HERMES model, the macroeconomic division has also developed a smaller model of the labour market, and a detailed demographic model which are used extensively in policy analysis.
Over the past number of years, the research of the division has focussed on the macroeconomic consequences of the crisis for the Irish economy. The results of this research are published on a regular basis in the Quarterly Economic Commentary. During 2011 a review of the origins and characteristics of the current economic crisis in Ireland was published in a study entitled "The Irish Fiscal Crisis". This examined how fiscal policy contributed to the crisis rather than preventing it. A more detailed study of government debt, and implied debt dynamics over the medium term, was published in September 2011 which examined the issue of debt sustainability and the policy options facing the Irish government (Irish Government Debt and Implied Debt Dynamics: 2011-2015). More detailed studies of the origins of the crisis have been published in "Restoring Credibility in Policy-making in Ireland" and in "The Irish Economy Today: Albatross or Phoenix?".
The division has also been involved in a number of studies on the broader EU Economy and its implications for Ireland. These studies considered the effects on the EU economy of the increased migration resulting from EU enlargement ("EU Enlargement and Migration: Assessing the Macroeconomic Impacts"); 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"); the EU banking sector and recovery in the EU economy (The Banking Sector and Recovery in the EU Economy). The division is also involved each year, along with its colleagues in EUROFRAME, in preparing a forecast for the Euro zone economy (Economic Assessment of the Euro Area: Winter 2011/2012).
The ESRI’s continuing work on measuring and understanding the role of fiscal policy in Ireland is reflected in publications on "Measuring Fiscal Stance", which considered the fiscal stance since the beginning of the crisis, and "Fiscal Policy for 2013 and Beyond", which discussed the appropriate stance of fiscal policy over the next few years. The paper entitled "The Impact of a Carbon Tax on Economic Growth and Carbon Dioxide Emissions in Ireland" used the HERMES model of the Irish economy to estimate the multiplier effects of changing different types of taxation. The paper "The Macro-economic Impact of Changing the Rate of Corporation Tax" considered the effects on the economy of the changes in the rate of corporation tax since the mid-1990s. Details of a wider range of “multipliers”, including these tax multipliers, are given in The Behaviour of the Irish Economy: Insights from the HERMES Macro-Economic Model. The paper Recovery Scenarios for Ireland: An Update considered how these multipliers for Ireland might be affected by the fact that the country risk premium is, itself, affected by changes in fiscal policy.
The evolution of the housing market in recent years has been a key feature of the current crisis. Articles on "The Irish Housing Market", "User Cost and Irish House Prices" and Irish Housing: A Role for Loan-to-Value Limits? examined the state of the housing market in 2012 and the factors that will be important in the future evolution of that market.
The role of the tradable sector in understanding the recent performance of the Irish economy is considered in "Inward Investment and Irish Exports over the Recession and Beyond" and "Trends in Irish Exports".
The current crisis has thrown up new challenges for macroeconomic modelling with the focus of attention shifting to the interaction of the real economy with the financial sector. This new focus is mirrored in developments internationally. The ESRI macroeconomic division is currently involved in developing a programme of research which is designed to further develop the suite of macroeconomic modelling tools in use. This new research will be used to further explore the likely medium-term impact of the crisis on the Irish economy over the coming year.
Programme Coordinator: John FitzGerald
Others currently working in this area include: Adele Bergin, David Duffy, Joe Durkan, Petra Gerlach, Ide Kearney, Niall McInerney, Edgar Morgenroth, Brian O'Connell, Conor O'Toole, Iulia Siedschlag and Nuša žnuderl