THE IRISH EXPANSIONARY FISCAL CONTRACTION - A TALE FROM ONE SMALL EUROPEAN ECONOMY

Irish experience during a recent period of severe fiscal adjustment at tracted international attention and was claimed to demonstrate an expa nsionary fiscal contraction. Using a small structural model which fits the stylized facts, we question the extent to which analysis provides convincing evidence in favour of the EFC hypothesis. Our model identi fies mechanisms through which fiscal policy operates in SOEs, and inco rporates model-consistent expectations. Simulations suggest that the i ntroduction of rational expectations moderates the contractionary effe cts of public expenditure cuts, but is unlikely to remove them entirel y. An alternative explanation of Ireland's positive growth experience is proposed, based largely upon external factors.