The Irish Economy

See here.

The IMF has done a major review of recent experiences with non-orthodox monetary policies

Unconventional Monetary Policies - Recent Experiences and Prospects

May, 16 2013
IMF Policy Paper

Summary of Informal Discussions with Central Bankers and Other Officials on Unconventional Monetary Policies

May, 16 2013
IMF Policy Paper

The Free Exchange blog on the Economist website features some articles on this topic:

• Ryan Avent:
  

  Broken transmission mechanisms

• Michael McMahon:
  

  The need for a targeted lending scheme in the euro area

• Gilles Moec:
  

  Europe faces a risk of “zombification”

• Luis Garicano:
  

  Banking union on the cheap will fail

Worth a look, Breugel’s assessment of the programmes in Greece and Ireland in particular, and the differential roles and internal tensions played by the individual members of the Troika, particularly the Commission. The large effects these programmes are having on unemployment is a key feature of the report.

Last week, I was one of the speakers at a workshop on the euro crisis at the Federal Reserve:  my paper is here.

This week the OECD released an update of their income inequality statistics which was covered in an article by Dan O’Brien in yesterday’s Irish Times.  For household disposable income Ireland is not unusually unequal.

• Gini co-efficient: Ireland 0.307 versus OECD average of 0.313
• 90/10 income share: Ireland 7.5 versus OECD average of 9.4

Under both measures Ireland is less unequal than the OECD average.  Data is for 2010 except for 2009 data from Hungary, Ireland, Japan, New Zealand and Turkey, and 2011 data from Chile.

The OECD dataset also includes a gini-coefficient for direct income (i.e. household income prior to taxes and transfers).  Direct income includes employee earnings, employer social insurance contributions, self-employed earnings and other direct income.  There is no data for Hungary, Mexico or Turkey.  The following chart has the most recent figures (mainly 2010) for this gini coefficient (most equal first).

For the 31 countries shown, Ireland has the highest level of inequality for direct income, and by some distance. The (2009) Irish figure is 0.591 compared to an arithmetic average for the sample of 0.470. 

Charts showing the impact each country’s tax and transfer system has on the gini coefficient and the resulting gini coefficients for household disposable income are below the fold.

Read the rest of this entry »

The conference on bank resolution mechanisms is next Thursday at IFSC, attendance is free but requires enrolment via Irene.ward@ucd.ie. Details of the poster session presentations are also now available and are shown below the main presentations.

Thursday May 23, 2013

Irish Institute of Bankers Conference Hall, International Finance Services Centre

9:15 am – 9:45 am: Registration and Opening Reception with Poster Session

9:45 am – 10:30 am: Ajai Chopra (International Monetary Fund) “A Banking Union for the Euro Area”

10:30 am – 11:15 am: Zhenyu Wang (University of Indiana) “On the Design of Contingent Capital with a Market Trigger”

11:15 am – 11:30 am: Coffee Break

11:30 am – 12:15 pm: Viral Acharya (New York University) “Analyzing the Systemic Risk of the European Banking Sector”

12:15 pm – 1:00 pm: Patrick Honohan (Central Bank of Ireland) “The Shifting Goals of Bank Resolution”

1:00 pm – 1:30 pm: Closing Reception with Poster Session

Presentations at the Poster Session: We encourage comment and discussion with poster presenters at the two poster sessions which open and end the conference.  Poster presentations include: Read the rest of this entry »

I dare say that readers of this blog do not all subscribe to “Le Petit Écho des Entremonts“, so here is an article I wrote for a forthcoming issue dedicated to the economy.

The new ESRI QEC is out -  executive summary here.

John Fitzgerald has a note on the impact of re-domiciled firms on Irish national accounts data here.  This relates to the phenomenon of international firms locating the headquarters office here for legal/tax reasons, even if all of its activities are elsewhere. A feature of balance of payments accounting is that the retained earnings of these firms are counted as part of Ireland’s gross national income (GNI)  [GNI used to be termed GNP until it was accepted that income was a better term than product, since the concept does not relate to domestic production].

John’s article shows that these retained earnings have been very large in recent years, so that the level of GNI has been boosted (with a large impact on the current account). This is why it it is important to also keep an eye on the international investment position (IIP), since the liabilities to the foreign investors that own these redomiciled firms rise in line with retained earnings and this will be reflected in the IIP.

If the pool of retained earnings is depleted by the payment of dividends to the shareholders, then GNI will decline -  so the initial boost to GNI is eventually reversed.

Also, some of these redomiciled firms are now shifting HQ back to the UK, which will also undo the effect.

So, the Irish national accounts now features two unusual elements:

(a) the large-scale operations of the affiliates of foreign multinationals mean that there is a large gap between GDP and GNI due to the high recorded profits of these firms. Moreover, the high import content of the exports of these firms means that there are analytical issues in understanding the dynamics of valued added in Ireland. To the extent that transfer pricing means that true imports are understated as a means to boost recorded profits, it also means that the trade surplus is overstated (but one-for-one net factor income is understated, so the current account is unchanged)

(b) the more recent feature is the impact of redomiciled firms which are counted as Irish firms, since the headquarters are here and even though these have virtually zero domestic activities and the ownership is entirely foreign.  As shown in John’s note, this sharply alters the interpretation of the GNI data -  but has no impact on the GDP data (which relates to domestic production).  It also sharply alters the interpretation of the current account data, which is a key variable in the European Commission’s “macroeconomic imbalances” scorecard.

So - both GDP and GNI data need to be handled with care. In particular, the traditional short cut of interpreting GNI as a better measure of true domestic activity is not wise  -   it is an income measure, not an activity measure.

It is important to emphasise that these are interpretation issues rather than measurement issues (the CSO implements the globally-agreed rules).

The writer Philippine Cour-Thimann is an ECB economist -  article here.

The investment strategy of the National Pension Reserve Fund has been much debated.  In the Spring 2013 issue of the Journal of Economic Perspectives, there is an interesting article by Bernstein,  Lerner and Schoar here.

The Irish planning and land-use system is very similar to the set-up in the UK. There is a re-think under way across the water and one of the main contributors will be visiting;

Speaker: Christian Hilber (LSE)

Topic: The British System of Land-Use Regulation: Key Features and (unintended) Economic Consequences 

Date and Time: June 30th at 5.30 pm

Venue: Davy Stockbrokers, 5th. floor, 49, Dawson St., Dublin 2.

Admission is free but you are requested to book - email Breeda.McRann@davy.ie

The Workshop is kindly sponsored this year by Dublin Chamber of Commerce.

The Politics of Sovereign Debt
The Helix, Dublin City University, 12 June 2013

The debt crises in Ireland and Europe require a combination of political
and economic analysis.  This conference includes cutting-edge papers from
leading international scholars.

950-1040: Dr Lauren Phillips, London School of Economics and Political Science
Chair: Paschal Donohoe, TD
Paper: Lauren Phillips, Politics, Policy and Sovereign Debt Market Volatility
in Advanced Economies

1040-1130: Dr Michael Bechtel, University of St Gallen
Chair: Stephen Donnelly, TD
Paper: Michael Bechtel, Jens Hainmueller, Massachusetts Institute of Technology,
Yotam Margalit, Columbia University, Studying Public Opinion on the Eurozone
Bailouts

1150-1250: Prof Marc Flandreau, Graduate Institute, University of Geneva
Chair: Prof Gary Murphy, DCU
Paper: Marc Flandreau, Causes and Consequences of Bondholders? Organizations
in the Nineteenth Century: A Revisionist View and a Research Agenda

140-230: Dr Roman Goldbach, University of Dresden
Chair: Dr Tim Hicks, Trinity College Dublin
Paper: Roman Goldach and Christian Fahrholz, Friedrich Schiller University,
Jena, The Euro Area?s Common Default Risk: Evidence on the Commission?s Effect
on Uncertainty

230-320: Dr Iain McMenamin, DCU
Chair: Dr Niamh Hardiman, University College Dublin
Paper: Iain McMenamin, Michael Breen, Juan Muñoz-Portillo, DCU, Elections,
Institutions and Sovereign Debt

340-430: Dr Joachim Wehner, London School of Economics and Political Science
Chair: Dr Donal de Buitléir, publicpolicy.ie
Paper: James Alt, Harvard University, David Lassen, University of Copenhagen
and Joachim Wehner, The Politics and Economics of Fiscal Gimmickry in Europe

The conference (including lunch and coffee) is free.  However, pre-registration
is necessary.  Please email juan.munozportillo2@mail.dcu.ie to pre-register.

The ESRI has just posted two Research Notes on credit constraints. The Note on Measuring Credit Constraints for Irish SMEs shows that finding customers has been the largest problem for SMEs. The analysis suggests that roughly one in nine SMEs faced credit constraints between April and September 2012. Micro firms, those not exporting and those in the construction, real estate, hotels and professional services sectors are most affected. The latest ECB data indicate that in recent months concerns about access to finance have become more wide spread. 

The Note on Younger and Older Households in the Crisis shows that between 2005 and 2010, average income and consumption dropped for younger Irish households, but rose for older households. The Note shows that younger households are most affected by unemployment, arrears and negative equity. It argues that credit constraints arising from these prevent younger households from smoothing consumption. Deleveraging helps to exit credit constraints arising from negative equity.

The FT has some important articles

• Op-ed by Wolfgang Schäuble Banking union needs firm foundations
• Accompanying news article here
• Details of the evolving position of various European institutions here

Following the influential work of Paul De Grauwe and Yuemei Ji, the idea that bond yield crises in the eurozone reflect liquidity (i.e. multiple equilibia) rather solvency has taken hold.   (See, for example, Paul Krugman linking to a post by Joe Weisenthal.)  The main evidence is the synchronised fall in yields when the ECB strengthened the LOLR regime with the annoucement of Outright Monetary Transactions (OMT), and also (indirectly) with the LTRO programme.   This leads to the view that the tough fiscal adjustment programmes are not required for countries to regain creditworthiness.   Here is Joe Weisenthal’s conclusion:

So we can trace the two peaks of Eurozone debt stress directly to two times the ECB intervened. Austerity has had nothing to do with the improvement in borrowing costs.

But is this account too simple?   In one sense I would possibly go even further than De Grauwe and Li: in the context of monetary union, vulnerable countries will not be able to avoid the bad equilibrium without a credible LOLR.   However, I also think it is important to recognise that what is fitfully emerging is a conditional LOLR.    Countries will only get support if they are undergoing required adjustments (OMT description here).   The announcement of OMT would then not help a country if investors believed it would not take the actions that would make it eligible.   The LOLR and the adjustments are then both necessary to prevent or reverse the slide to a bad equilibrium.   

Of course, it could still be argued that the explicit or implicit conditionality is inappropriately demanding (e.g., focusing too much on reductions in the actual deficit as opposed to the structural deficit).    But given the regime as it is, the existence of OMT does not obviate the need for fiscal adjustments to steer clear of the bad equilibrium trap.

The new pilot scheme by the Irish Central Bank, specifying the claim priority of residential mortgage debt and unsecured consumer debt, is worth a brief mention here. It alters the features of Irish consumer debt contracts in terms of security and seniority. I have no legal training and I am unsure of my interpretation, so comments are welcome. Read the rest of this entry »

In a statement issued at the end of this Review yesterday, we were given the by-now familiar plaudits for achieving various benchmarks. Going forward, ’strict implementation’ of this year’s budgetary targets is urged.

The gravity of the unemployment situation is acknowledged. ‘Swift action needed to deal with unemployment’ the newspaper headlines proclaimed. The onus for this is placed on the Irish government and a familiar list of policies proposed, including for example ‘the need for enhanced engagement with the unemployed and the opening up of competition in sheltered sectors like legal services’.

I wonder how much our readers think increased competition between lawyers will contribute to lowering our unemployment rate.

The new bulletin is out, with the following special articles:

• 09/05/2013 - Publication: Article, Monthly Bulletin, May 2013, pp 71-83, An assessment of Eurosystem staff macroeconomic projections, 423 kb, en
• 09/05/2013 - Publication: Article, Monthly Bulletin, May 2013, pp 85-101, Country adjustment in the euro area: where do we stand?, 326 kb, en
• 09/05/2013 - Publication: Article, Monthly Bulletin, May 2013, pp 103-114, Target balances and monetary policy operations, 631 kb, en

In honour of the fine examination weather we are having these days:

According to this morning’s Eurointelligence,

The Eurogroup will analyze to what extent past imbalances contribute to the current low growth, according to an unnamed Eurogroup official, and also whether Spain’s large current account deficit prior to the crisis can be attributed to the housing bubble, inappropriate banking supervision, or lax credit standards.

Does it make sense to attribute Spain’s current account deficit to Spanish policies alone? Be explicit about the theoretical and empirical assumptions you are making.

Olivier Blanchard and Daniel Leigh provide a good account of the trade-off facing policy makers in identifying the optimal speed of fiscal adjustment.   See also Chapter 2 of the IMF’s recent Fiscal Monitor.   Reasons for slower adjustment include time-varying multipliers, the danger of “stall speed” where adverse feedback loops kick in at low or negative growth rates, and hysteresis effects from fiscal contractions that are worse when the economy is already in recession.   The main reason for faster adjustment is the danger of falling into a bad equilibrium with high interest rates and high expectations of default, especially where it is difficult to credibly commit to future adjustments.  

Simon Wren-Lewis gives a sceptical response here.  Paul Krugman responds here, here and here.  

The debate focuses mainly on the trade-off for a country such as the UK that retains its own independent monetary policy.   In contrast to the uncertainty that surrounds such empirical questions as the size of fiscal multipliers or the causal link from debt to growth, recent experience in Ireland and elsewhere shows that the risk of falling into a “bad equilibrium” is not hypothetical for a high-debt country within EMU.   For fragile EMU members, an additional factor is the existence of a conditional lender of last resort, where one of the conditions for support could be a forced restructuring of privately held debt (PSI).   (I make an initial stab at integrating a conditional LOLR into a model with possible multiple equilibria here)

We have learned a few lessons over the years. Monetary policy and market regulation are better done at arm’s length of the government. The generalists in the Dail set the broad goals, but leave the details to quasi-independent technocrats. Macro-prudence is now being added to those broad goals.

Micro is another matter. Policy-makers instinctively reach for the second-best. Sometimes that is the best feasible regulation. Sometimes that creates rents for their clients. And sometimes it is just the force of habit.

The Examiner reports that Minister Hogan suggested that smokeless fuels be given a break on the carbon tax. Really? The carbon tax regulates carbon dioxide emissions. Smokeless fuels and smoky fuels differ in their particulate emissions. A carbon tax break may reduce particulate emissions but would increase carbon dioxide emissions.

A carbon tax break would make climate policy more expensive. Emission reduction is cheapest when there is a uniform price. At the moment, there are three carbon prices: EU ETS, carbon tax, and zero. Hogan proposes there’d be four: EU ETS, carbon tax, reduced carbon tax, and zero. The reduced carbon tax would hold for coal and peat, the fuels that emit most carbon dioxide per unit of energy.

A carbon tax break would also make particulate policy more expensive. At the moment, there is a range of regulations including technical standards (e.g., in transport) and local bans (e.g., on selling smoky fuels in cities). A tax break would add yet another layer of regulation. The impact on costs is predictable: They will rise as any move away from first-best regulation does (Tinbergen 1952).

The impact on emissions is unknown. There are two substitution effects: (1) smoky -> smokeless coal and peat; and (2) oil and gas -> coal and peat. The carbon tax break would apply to all smokeless fuel, not just to smokeless fuel sold in places where smoky fuels are banned. Smokeless fuel use may increase more that smoky fuel use falls.

Recall that smokeless fuels are not particulate-less. There are no visible emissions. Invisible particulates, the ones that do real damage, are emitted nonetheless.

If Minister Hogan wants to reduce particulate emissions, he should impose a particulate tax (and abolish the ineffective sales ban) or extend the sales ban to the entire country.

A holy trinity — or perhaps a troika? — of beliefs has guided policy since 2010. These are that austerity is expansionary; that the sky will fall in if ever the debt to GDP ratio exceeds 90%; and that the way to do austerity is to cut expenditure rather than raise taxes.

All of which is very convenient if what you really want to do is shrink the state.

We know how well the first two nostrums have performed when confronted with empirical evidence, so you might think that people would be just a wee bit cautious about stating the third as gospel truth. But no, here is Mario Draghi:

First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect.

Paul Krugman helpfully reminds us where this belief came from, and what happened next. The ECB is constantly telling us that it has a narrowly restricted mandate, with its primary concern being inflation. In that case, then surely the least that we are entitled to expect is that it keeps its views about the composition of fiscal adjustments to itself?

The European Commission have released their Spring 2013 Economic Forecast which can be accessed here, with the forecasts for Ireland extracted here.

The NYT Magazine has a long piece on the US economy, featuring Summers and Hubbard here.

The European Commission also sponsored a set of papers on economic growth: the overview by Karl Pichelmann is here and the individual papers are below

Ben Broadbent gave a speech on the topic last night - it is here.

The debate within the Seanad around Senator Sean Barrett’s private member’s bill on financial stability and reform is here. It’s well worth looking at. Some of the contributions are excellent, and I think it gives us a sense of what’s going on within policy circles as well as they types of legislative actions that might be considered by the government in the coming years around transparency and accountability.

The Eurozone banking system is not working properly due to fragmentation between core and peripheral banking systems. In a recent speech, the president of the ECB, Mario Draghi, has acknowledged this, but argues that fixing this problem is someone else’s responsibility. The ECB has the tools to address this crucial flaw in the Eurozone system, and over the medium term horizon there is no other Eurozone institution that can. The ECB should use the tools available to fix this market fragmentation, in particular, the ECB should engage in aggressive, long-term asset refinancing on sufficiently generous terms to encourage bank participation. Read the rest of this entry »

There is a new BIS paper on the implications of a central bank’s balance sheet.

Abstract:

This paper looks at the relevance of a central bank’s own finances for its policy work. Some central banks are exposed to significant financial risks, partly due to the environment in which they operate, and partly due to the nature of policy actions. While financial exposures and losses do not hamper central banks’ operational capabilities, they may weaken the effectiveness of central bank policy transmission. Against this backdrop, the paper analyses the determinants of a central bank’s financial position and the possible implications of insufficient financial resources for policymaking. It also provides a conceptual framework for considering the question of whether central banks have sufficient financial resources.