Ireland in EMU: More Shocks, Less Insulation?

Abstract

Despite anchoring the Irish monetary system to a single currency, EMU has triggered sizable exchange rate and especially interest rate shocks to the Irish economy (albeit not appreciably greater than under previous regimes). Interest rates have deviated widely from a standard Taylor rule would have counseled ? though again not by much more than in previous regimes. The biggest shock has been the sharp fall in nominal interest rates as EMU began. Through mechanisms which we formally model, this fall has had a lasting effect on property prices, construction activity and the capacity of the labour market to absorb immigration, but there has been a sharp deterioration in wage competitiveness since 2002.