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Vedran Šošić , CNB

Comments on : “ Euro Membership and Bank Stability: Friends or Foes? Lessons from Ireland ” by Patrick Honohan. Vedran Šošić , CNB. Motivation. To find the difference between Iceland and Ireland Answer: One letter Six months … but also Central bank. What makes Ireland special?.

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Vedran Šošić , CNB

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  1. Comments on:“Euro Membership and Bank Stability: Friends or Foes? Lessons from Ireland”byPatrick Honohan Vedran Šošić, CNB

  2. Motivation • To find the difference between Iceland and Ireland • Answer: • One letter • Six months … but also • Central bank

  3. What makes Ireland special? • World-beating property bubble followed by a fall in property prices • Collapse in the construction and real estate business • One of the most severe downturns anywhere in the world

  4. Real house prices were amongst the fastest growing

  5. House price gap amongst the largest

  6. Why? • Real interest rate channel • It was widely acknowledged and discussed • E.g. Honohan (2006) provides an overview of the literature on the difference between RIR and Taylor rule in Ireland • Complacency about possible fallout • “The Myth” explanation and previous experience with housing bubbles – whether it is sufficient? • We need to better understand reasons for complacency in order not to make the same mistakes all over again • Both effects were brought by eurozone membership

  7. Interest rate channel - Consumer prices

  8. Is it really that bad?(cumulative real GDP growth, 1998=100)

  9. What about the competitiveness channel? • Equilibrating force • Was supposed to deteriorate during the boom, but actual deterioration not so big • Flexible economy should make possible rapid improvement in competitiveness • How persistent will the effects of the collapse be?

  10. Exports gaining ground even during the boom years

  11. Only mild deterioration of current account

  12. Role of the central bank • Substantial increase in ECB lending to Irish banks: • Feb-2009 over Mar-2008 increase of 326% • Not dissimilar to CB of Iceland: • Mar-2008 over May-2007 increase of 285% • However, Iceland had to turn to IMF because ability to lend in other currencies than krona was limited

  13. Eurozone membership and financial markets • Eurozone as a policy anchor • No exchange rate risk • Debt of eurozone members priced much more cheaply • Possible to save the finanancial system and conduct countercyclical fiscal policy

  14. Role of other policies • Implicit assumption that other policies could have been used • More restrictive fiscal policy, abolition of fiscal incentives • Whether that would be sufficient, what else? • Eurozone (aut also EU) membership makes impossible many of the other options • More discussion about what could make the difference

  15. Would this be possible inside the eurozone?

  16. To conclude 'Halt,' he croaked. 'Halt. What goes there?' ... 'I mean, friend or foe?' he stuttered, trying to avoid Mort's gaze. 'Which would you prefer?' he grinned. It wasn't quite the grin of his master, but it was a pretty effective grin and didn't have a trace of humour in it. The guard sagged with relief, and stood aside.'Pass, friend,' he said. Terry Pratchett, Mort

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