Fiscal multipliers in Ireland using FIR-GEM model. ESRI WP636, September 2019

This article employs the newly developed FIR-GEM model to compute fiscal multipliers in Ireland for the main tax-spending policy instruments, namely government consumption, public investment, public wages, public transfers, consumption, capital and labour taxes. We focus on the short run fiscal multipliers as a measure to evaluate the effect of a temporary fiscal stimulus policy over three years. We find that the size of output multipliers crucially depends on the openness of the Irish economy and the method of fiscal financing employed. Our main results indicate that spending increases or tax cuts increase Irish GDP but Irish fiscal multipliers are relatively smaller in magnitude due to the openness of the economy. That is the increase in aggregate output is partly offset due to the negative effect of a fiscal stimulus in the Irish external balance. A fiscal expansion via spending increases or tax cuts results in a compositional change in aggregate Irish output. The positive effects on aggregate output come mostly from the stimulative effects induced in the non-tradable sector while the tradable sector remains unaffected or reduces in size. A fiscal stimulus is likely to crowd out exports and crowd in imports; this results in a deterioration in Irish trade balance. Magnitude-wise short run spending multipliers are consistently higher than short run tax multipliers. The highest fiscal multiplier effect is as a result of spending on public investment and government consumption. A fiscal stimulus via spending and consumption tax cuts have a higher effect on impact but can put upward pressures on domestic prices vis-à-vis the rest of the world and lead to a deterioration in Irish international competitiveness in the longer run. A fiscal stimulus via income tax cuts take more time to materialize and has a smaller effect on impact but the stimulus can reduce production costs and prices. This improves the international competitiveness of the Irish economy and has a more positive effect over the longer-term

FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland. ESRI WP620, March 2019

This paper presents FIR-GEM: Fiscal IRish General Equilibrium Model. FIR-GEM is a small open economy DSGE model designed as fiscal toolkit for fiscal policy analysis in Ireland. To illustrate the model's potential for fiscal policy analysis, we conduct three types of experiments. First, we analyse the fiscal transmission mechanism through which Irish fiscal policy affects the Irish economy. Second, we compute fiscal multipliers for the main tax-spending instruments, namely government consumption, public investment, public wage bill, public transfers, consumption, labour and capital tax. We focus on a fiscal policy stimulus that is either implemented through spending increases or tax cuts. Third, we perform robustness analysis on key structural characteristics that can affect quantitatively the size of fiscal multipliers. We find that the size of fiscal multipliers in the Irish economy heavily depends on its degree of openness, the method of fiscal financing employed, the elasticity of the sovereign risk premia to Irish debt dynamics and the flexibility of Irish labour and product markets

Public Debt Consolidation and its Distributional Effects. ESRI WP629, July 2019

We build a dynamic general equilibrium model with heterogeneous households, namely Rich and Poor, and capitalskill complementarity structure in the production function, to study aggregate and distributional implications of fiscal consolidation policies when the government uses a rich set of spending and tax instruments. Fiscal policy is conducted through constrained optimized fiscal rules. Our results show that, in the long run, fiscal consolidation enhances both aggregate efficiency and equity; however, it may hurt Rich households depending on which fiscal instrument takes advantage of the fiscal space created. Along the transition, wage inequality significantly increases due to the capital skill complementarity structure of the production function. Specifically, this happens because debt consolidation crowds in capital and this favours Rich (skilled) households. On the other hand, the reduction in interest rates and government bonds lead to a decrease in Rich households income coming from capital and government bonds which eventually decrease income inequality. Finally, a rather novel finding is that the combination of asset and skill heterogeneity amplifies the increase in wage inequality in the early phase of fiscal consolidation

Debt sharing after COVID-19: How the direct involvement of EU institutions could impact the recovery path of a member state. ESRI Working Paper 663 July 2020.

The likely substantial impact of Covid-19 related measures on the public finances of European countries has prompted an unprecedented call for new and significant policies at a European level to alleviate the pressures on individual member states. The administrative closures adopted across a number of economies has resulted in a complete cessation of certain types of economic activity, a significant increase in unemployment and profound fiscal challenges for the countries in question. In this paper we use a SOE-DSGE model to assess the role European institutions can play in mitigating the negative economic and fiscal effects of the crisis for a particular member state by participating directly in the sovereign debt management of that country. Our results indicate that the direct involvement of EU institutions via sovereign bonds purchases increases the efficiency of the extraordinary fiscal stimulus packages undertaken by member states. A fiscal stimulus at the national level backed by EU financing reduces the output losses in the first year which would otherwise occur. The reduction in the output loss ranges from 0.8 per cent to 1.4 per cent depending on the mix of fiscal policies chosen by the member state. The cumulative reduction in output loss over a five-year horizon could sum to 2.5 per cent to 4.1 per cent depending on the fiscal policy mix chosen

Effective tax rates in Ireland. ESRI Research Series 110 November 2020.

This article provides estimates of the effective tax rates in Ireland for the 1995-2017 period. We use these aggregate tax indicators to compare the developments in the Irish tax policy mix with the rest of the European Union countries and investigate any potential relation with Ireland’s macroeconomic performance. Our findings show that distortionary taxes, e.g. on factors of production, are significantly lower while less distortionary taxes, e.g. on consumption, are higher in Ireland than most European countries. Thus, the distribution of tax burden falls relatively more on consumption and to a lesser extent on labour than capital; while in the EU average the norm is the opposite. The descriptive analysis indicates that this shift in the Irish tax policy mix is correlated with the country’s strong economic performance

How openness to trade rescued the Irish economy. ESRI WP608, December 2018

In this paper we examine the performance of the Irish economy over the period 2008 to 2014. In particular we examine whether the recovery observed was due to the successful adoption of structural reforms in labour and product markets or whether the improved performance was due to a rebalancing of the Irish economy, post 2008, away from the disproportionate influence of the construction (non-tradable) sector and back to the more productive tradable sector? Prior to 2007 had seen the emergence of a significant, property-related credit boom which resulted in the Irish economy being increasingly influenced by the non-tradable sector. This was in sharp contrast to the earlier period of the Celtic tiger, which had mainly relied on export-orientated growth. We use a small open economy DSGE model with a tradable and a non-tradable sector to examine this issue. Our results suggest that the financial crisis acted as a rebalancing mechanism for the Irish economy, with the tradable sector contracting less and recovering quicker than the non-tradable sector. Our model-based simulations indicate that the Irish recovery is mostly export-driven with structural reforms playing a very minor role in stimulating growth in the immediate period after the crisis

Fiscal policy and growth in a panel of EU countries over 1995-2017. ESRI Working Paper 675 September 2020.

This paper reassesses the predictions of the standard Barro-type endogenous growth models drawing on recent developments in the panel time series literature. In particular, we employ the Common Correlated Effects (CCE) estimator developed in Pesaran (2006) and estimate the effects of fiscal policy for a panel of EU countries using annual data from 1995 to 2017. Our results provide strong support for the predictions of the standard endogenous growth model. More importantly, the CCE estimation generates significantly larger effects of fiscal policy on growth with respect to the other widely used estimation methods. Our comparative analysis indicates that estimation methods which ignore the heterogeneous impact of unobserved common factors across countries could lead to a significant underestimation of the effects of fiscal policy on growth

Comparing two recessions in Ireland: Global Financial Crisis vs COVID-19. ESRI QEC Research Note 20200401 December 2020.

The QEC Research Note ‘Comparing two recessions in Ireland: Global Financial Crisis vs COVID-19’ compares the evolution of key economic indicators across the two most recent recessions in the Irish economy. We compare and contrast three types of indicators, hard indicators which measure realised outcomes, soft indicators which measure sentiments and expectations and policy responses

FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland

This paper presents FIR-GEM: Fiscal IRish General Equilibrium Model. FIR-GEM is a small open economy DSGE model designed as fiscal toolkit for fiscal policy analysis in Ireland. To illustrate the model's potential for fiscal policy analysis, we conduct three types of experiments. First, we analyse the fiscal transmission mechanism through which Irish fiscal policy affects the Irish economy. Second, we compute fiscal multipliers for the main tax-spending instruments, namely government consumption, public investment, public wage bill, public transfers, consumption, labour and capital tax. We focus on a fiscal policy stimulus that is either implemented through spending increases or tax cuts. Third, we perform robustness analysis on key structural characteristics that can affect quantitatively the size of fiscal multipliers. We find that the size of fiscal multipliers in the Irish economy heavily depends on its degree of openness, the method of fiscal financing employed, the elasticity of the sovereign risk premia to Irish debt dynamics and the flexibility of Irish labour and product markets

Dynamic tax revenue buoyancy estimates for a panel of OECD countries. ESRI WP592, March 2018

In this paper we provide short- and long-run tax buoyancy estimates for a panel of OECD countries. Our results indicate that total tax revenue estimates are not different from unity, corporate income tax buoyancies exceed unity both in the long- and the short-run, while personal income tax buoyancies are smaller than unity; these results are robust to controlling for changes in the respective tax rates. Moreover, after taking into account the fluctuations of the business cycle, we observe that CIT estimates are larger during periods of contraction rather than periods of economic expansion; these results hold both for the whole panel and the Irish economy. Moreover, we examine the effects of using GNP instead of GDP as a base of economic activity for the Irish economy. Although the results are qualitatively the same, the differences need to be taken into account, especially form an economic policy point of view