Dynamic Factor Demands in a Changing Economy - An Irish Application

In this paper a model of dynamic factor demands is presented for the Irish economy. Total costs, labour and capital are modelled on a two-stage basis. First, a static, long-run cost function is specified which allows for the derivation of expressions for optimal labour and capital demand. This function is assumed to be of the flexible, translog form and thus more general than the generic Cobb-Douglas application. In the second stage, a dynamic cost function is specified which nests the long-run static approach. Growth rates in factor shares are derived from the dynamic approach and the rate of adjustment of input use to factor price changes is examined through the use of short and long-run elasticities.

Credit conditions and tenure choice: A cross-country examination [on housing market]. ESRI WP582, December 2017

An understanding of the house price to rent ratio and its determinants is important in assessing housing market developments and tenure choice therein. While the ratio is most usually explained by the user cost of capital, the influence of credit conditions on it has been added to econometric assessments in recent years. Using a new cross-country panel, we estimate the impact of variations in credit conditions on the house price to rent ratio between 1994 and 2015 on both a panel and country-by-country basis. This period was one of substantial cross-country house price movements as developments in standard explanatory variables, such as income levels, interest rates and demographics, were accompanied by major changes in credit markets. In line with other recent studies, our results establish the relevance of credit conditions to the house price to rent ratio at both panel and country levels. Moreover, the evidence points to credit conditions dominating the user cost of capital over the sample period, emphasising the need to include credit analysis when evaluating housing market developments

How are Irish households coping with their mortgage repayments? Information from the SILC Survey

This paper uses information contained within the Survey on Income and Living Conditions (SILC) to examine the ability of Irish households to sustain their mortgage repayments. We calculate mortgage repayment to income (MRTI) ratios for a representative sample of Irish households and examine the distribution of this ratio. In particular, we stratify information on marital, work and educational status along with household composition according to this MRTI. We also examine the distribution of information on household mortgages such as the source, the interest rate paid, the age and tenure, and the monthly repayment of the mortgage according to the same ratio. Finally, the distributional implications for the MRTI of a significant unemployment and interest rate shock are also examined.

Prospects for Growth in the Euro Area

We review the recent performance of the Euro area economy, focusing in detail on the separate roles played by labour input, capital input, and total factor productivity (TFP). After a long period of catching up with US levels of labour productivity, Euro area productivity growth has, since the mid-1990s, fallen significantly behind. We show that this recent divergence has accelerated since 2000, and that this is mainly due to the poor rate of Euro area TFP growth. Based on prevailing trends, we estimate that potential output growth in the Euro area currently may be running as low as 1.5 percent per year. In addition, if TFP growth stays at recent levels, the output growth rate will decline further due to weaker capital deepening. To consider future Euro area prospects for growth, we examine a set of alternative scenarios, each of which posits a potential increase in a determinant of output growth. One of these scenarios focuses on the potential effects of greater labour market deregulation.

How Are Irish Households Coping with their Mortgage Repayments? Information from the Survey on Income and Living Conditions

This paper uses information contained within the Survey on Income and Living Conditions (SILC) to examine the ability of Irish households to sustain their mortgage repayments. We calculate mortgage repayment to income (MRTI) ratios for a representative sample of Irish households and examine the distribution of this ratio across the sample. In particular, we stratify information on marital, work and educational status along with household composition according to this MRTI. We also examine the distribution of information on household mortgages such as the source, the interest rate paid, the age and tenure, and the monthly repayment of the mortgage according to the same ratio. Finally, the distributional implications for the MRTI of a significant unemployment and interest rate shock are also examined.

Prospects for Growth in the Euro Area

We review the recent performance of the Euro area economy, focusing in detail on the separate roles played by labour input, capital input, and total factor productivity (TFP). After a long period of catching up with US levels of labour productivity, Euro area productivity growth has, since the mid-1990s, fallen significantly behind. We show that this recent divergence has accelerated since 2000, and that this is mainly due to the poor rate of Euro area TFP growth. Based on prevailing trends, we estimate that potential output growth in the Euro area currently may be running as low as 1.5 percent per year. In addition, if TFP growth stays at recent levels, the output growth rate will decline further due to weaker capital deepening. To consider future Euro area prospects for growth, we examine a set of alternative scenarios, each of which posits a potential increase in a determinant of output growth. One of these scenarios focuses on the potential effects of greater labour market deregulation.Growth, Euro Area, TFP

Assessing the Role of Income and Interest Rates in Determining House Prices

Property prices across many OECD countries have witnessed remarkable increases over the past 10 years. Two factors frequently posited for this boom are higher income levels and the benign interest rate environment experienced in many of these countries. However, empirical models of house prices struggle to achieve credible results concerning the impact of interest rates with coefficients that are frequently insignificant or of the wrong sign. In this paper we propose an intuitive theoretical model of house prices where the demand for housing is driven by how much individuals can borrow from financial institutions. This level of borrowing depends on disposable income levels and current interest rates. We empirically test this model by applying it to the Irish property market. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow with plausible and statistically significant adjustment to this long run equilibrium.

The United States as a growth leader for the Euro Area - A multi-sectoral approach

In this paper we examine the role played by technology spillovers between the United States and the Euro area. We explicitly assume that the United States acts as a growth leader for Europe and that the Euro area is constantly converging to US total factor productivity (TFP) levels. As a result, a growing divergence in the level of US TFP vis-`a-vis that of Europe results in an increase in the growth rate of Euro area TFP. The model is applied to TFP data from 26 subsectors of both economies. The role of greater ICT adoption in increasing Euro area TFP is also explored.

Solow (1956) as a Model of Cross-Country Growth Dynamics

Despite the widespread popularity of the Solow growth model, much of the recent empirical work based on the classic framework misrepresents a crucial feature of the model. Namely, the growth rate of technological progress, assumed to be exogenous in the Solow model, is often identified as being constant across countries. This simplification of the behaviour of technological progress runs counter to the evidence and has had a number of significant implications for the interpretation of the Solow model. One implication has been an overemphasis on the role of factor accumulation in explaining cross-country income differentials. In addition, the commonly-cited empirical result that the speed of conditional convergence is slower than predicted by the Solow model is a function of this inaccurate assumption about technology rather than due to a failure of the model itself.

Conditional Convergence Revisited: Taking Solow Very Seriously

Output per worker can be expressed as a function of technological efficiency and of the capital-output ratio. Because technology is exogenous in the Solow model, all of the endogenous convergence dynamics take place through the adjustment of the capital-output ratio. This paper uses the empirical behaviour of the capital-output ratio to estimate the speed of conditional convergence of economies towards their steady-state paths. We find that the conditional convergence speed is about seven percent per year. This is somewhat faster than predicted by the Solow model and is significantly higher than reported in most previous studies based on output per worker regressions. We show that, once there are stochastic shocks to technology, standard panel econometric techniques produce downward-biased estimates of convergence speeds, while our approach does not.