Our Modelling Suite

The Central Bank of Ireland utilises a suite of models approach in analysing the impact of developments in the economy, both domestic and external, as well as assessing the impact of policy changes such as monetary, fiscal or macroprudential changes. We utilise two main types of large aggregate general equilibrium models of the domestic economy (a) a large semi structural econometric model and (b) a suite of dynamic stochastic general equilibrium models. Given the highly open nature of the economy these models are complemented by models of the global economy as developments or policy changes in the rest of the world have important spillover effects on the domestic economy.  

Semi-structural econometric model

This model combines accounting relationships with estimated behavioural equations in order to make predictions about an economy’s response to shocks. The major macroeconomic variables are expressed in the form of error correction equations. In the long run, these converge towards a certain target, which is determined by economic theory. Our current model is a three sector model of the Irish economy including traded, non-traded and government sectors. In addition, the housing market is also modelled and the model also includes an aggregate banking sector where banks lend to households (consumer and mortgage loans), firms and construction and real estate. Lending rates are a function of ECB rates, delinquency and capital needs of the banks. Given the highly open nature of the Irish economy, international developments are pivotal to the outlook for the economy.  This model is linked to NIESR’s global model NiGEM which takes into account world developments including demand and supply from Ireland’s trading partners as well as the evolution of European and world interest rates and exchange rates (Conefrey et al. 2018). The macrofinanical linkages in the model our outlined in McInerney (2020)

The model is used to assess changes in the economic environment such as changing domestic and international economic conditions, oil prices, interest rate changes, overheating and the housing market Conefrey et al. (2019) Covid and the related policy (Conefrey et al. 2020, 2021) response, Brexit (Conefrey and Walsh 2020) and the war in Ukraine etc. It also been used to develop stress case scenarios for the Macrofinancial Stability report. In addition, it has been used to assess impact of macroprudential measures.

Advantages: Closer fit to the data and easier to add additional elements.

Disadvantages: Expectations are mainly backward looking or implicit. More susceptible to the Lucas critique.

 Suite of Dynamic Stochastic General Equilibrium (DSGE) models

These models are strongly grounded in economic theory where the optimising problems of firms, households and policy makers are explicitly modelled. Expectations are forward looking and are model consistent. The exact transmission mechanisms are more explicit than in structural econometric model.

Eiremod is a small open economy model of the Irish economy with both a traded and non-traded sectors as well as government (Clancy and Merola, 2016). It also has a banking sector primarily related to mortgage lending. This model has been used in assessing macroprudentials rules including borrow based measures including loan to value and income ratios (Lozej and Rannenberg 2016), as well as the countercyclical capital buffer (Clancy and Merola, 2017; Lozej et al., 2022). The model is not currently linked to a global model. It has also been extended to examine the impact of migration, as well as modelling unemployment (Lozej 2018).

EAGLE (Euro Area and the Global Economy) is a 4 region DSGE model of the world economy with traded and non-traded sectors used both at the ECB and in the eurosystem. It consists of the euro area, which is modelled as two blocs (Ireland and the rest of the euro area), US, and the rest of the world. It has been calibrated to Ireland and is used particularly where an international dimension is important. The model has been extended in a number of different directions including adding additional elements to the government sector (Clancy et al. 2016), allowing a richer labour market structure through search and matching frictions (Jacquinot et al. 2018).  In an Irish context, the model has also examined government fiscal policy (Hickey et al. 2018, Clancy et al. 2016), trade wars (Jacquinot et al. 2021), effects of Covid (Garcia et al. 2023) and global supply chain reorientation (Clancy et al. 2023).

Advantages: Transmission mechanisms clearly laid out. Expectations explicitly modelled. In theory more robust to Lucas critique.

Disadvantages: Not easy to modify, takes a lot of development to introduce new features. Less tied to the data.

Both type of models are currently being developed to take into account climate related issues.

Questions the models have been used to assess?

Impact of developments in the world economy:

Impact of external shocks and how they are likely to be propagated through the domestic economy. These involve scenarios such as external negative demand or supply side shocks to one or more of our main trading partners. Some examples examined in the recent past include the effects of higher oil and gas prices, Brexit, external effects of Covid on the economy, lower growth prospects for the UK, the war in Ukraine as well as changes in economic policy such as higher interest rates in the euro area or the US, changes in fiscal policy such as the Biden stimulus plan and assessing the effects of Covid interventions by governments and central banks to ameliorate the effects of the pandemic and the impact of greater protectionism.

 Developments and Policy in the Domestic Economy.

While Ireland is a very open economy, domestic considerations also affect the economy. Work in the recent past has examined the effect of potential overheating in the economy through the labour market and housing markets could affect competitiveness. In addition, the effects of the pandemic on domestic economy has also been closely examined, including how a worsening economy may feed into tighter banking and financial conditions and then further impact the economy. The impact of domestic fiscal policy both in terms of its impact on the economy as well as on the outlook for the public finances. This has been examined both in terms of the tax and expenditure sides. Our models have also been used to assess the macroprudential framework both in terms of the impact of the introduction of borrower based measures such as loan to value and loan to income as well as the countercyclical buffer and to assess the impact of changes in macrofinancial conditions on the broader economy as well as the impact of higher house prices and its impact on the economy