Macroeconomic shocks under alternative exchange rate regimes: the Irish experience

The paper investigates the nature of Irish macroeconomic shocks and their correlation with German and UK shocks. A restricted VAR of real output and prices is employed to distinguish aggregate demand and supply shocks for the three countries. To identify the role of Irish exchange rate policy two periods are considered: the preERM period and the ERM period. The results indicate that while the change in exchange rate policy had an effect on the nature of demand and supply shocks, the ERM did not have the effect of increasing the correlation of Irish shocks with Germany or the UK. Evidence of substantial asymmetric shocks with Germany and the UK exist. Thus, Ireland as a member of the EMU faces increased cost of adjustment to asymmetric macroeconomic shocks.