APPENDIX I EMPIRICAL APPLICATIONS
Eichengreen B., and T. Bayoumi (1994), One money or many?: analyzing the prospects for monetary unification in various parts of the world, Princeton studies in International Finance no. 76.
The Economic and Social Research Institute (1996), Economic implications for Ireland of EMU, Baker T., Fitz Gerald J., and P. Honohan (eds.), Policy research series, Paper no. 28.
Jansson, P. (1996), Sverige och den europeiska monetära unionen; hur stor är sannolikheten att vi drabbas av asymmetriska chocker? Background Report for the Swedish Government Commission on EMU.
Leddin A., and B. Walsh (1997), Economic stabilization, recovery, and growth: Ireland 1979-96, Center for Economic Research Working Paper Series, WP/97/8
Neary P., and R. Thom (1996), Punts, pounds, and euros: in search of an optimum currency area. Paper presented at the Dublin Economic Workshop Economic Policy Conference, Kenmare, 18–20 October 1996.
Pissarides C. (1996), The need for labor market flexibility in European Economic and Monetary Union, Background Report for the Swedish Government Commission on EMU.
Prepared by Lars Meuller.
Based on swap interest rates (published in Financial Times, May 27) the market assigns a probability of 75 percent that Ireland enter EMU in January 1999, compared to 59 percent four weeks earlier.
For a more comprehensive review of the Irish pound in the ERM, see “Ireland’s Trade and Financial Links with the United Kingdom” in SM/96/140 (June 17, 1996).
The central bank had indicated in its spring policy statement that policy should be tightened would the effective exchange rate move lower.
There are two conflicting views regarding whether the income correlation is likely to go up or down, as the result of linking the currencies. Empirical results in Frankel and Rose (1996) suggest that the positive effect dominates and that the relationship between trade and income correlation is robust to various measures of income (GDP, industrial production, consumption, etc.) and de-trending methods.
Analysis by Eichengreen (1996) suggests that Ireland has converged in economic structure and trade orientation toward the EU core between 1987 and 1995.
Industrial production is chosen as the measure of economic activity on the basis of a sufficiently long and large sample of a consistently defined variable.
Ireland is one of few countries where the volatilities of the shocks to production, as measured by the standard deviation of the estimated residuals, have increased in the later sample.
This consideration is also reflected in the ESRI computations of costs resulting from economic shocks (section C).
Strictly speaking, adjustment refers to a new equilibrium following a permanent shock as opposed to stabilization to the same equilibria following a temporary shock. The former requires either movements in relative prices and wages or movements in labor and capital. In the case of stabilization, however, changes in term-of-trade would mitigate the shocks, just as in the case of adjustment, but movements in productive factors should be avoided.
Gtven that the pact is formulated in levels of GDP, it imposes a tighter discipline on countries such as Ireland with high trend growth rates (see SM/97/138, Appendix IV).
Two recent studies on Irish consumer price inflation and wages, using multivariate cointegration techniques have a contrasting focus. The ESRI (1996), indicates that both Irish prices and wages can largely be explained by developments in the United Kingdom; and that the degree of nominal price inertia is suggested by estimates showing that nominal prices and wages takes three to four years to folly adjust in response to a sterling shock. In contrast, analysis by Kenny and McGettigan (1997) points to the strong role played by the nominal effective exchange rate and foreign prices for Irish consumer price inflation; and the stable relationship between Irish wages and aggregate consumer prices.