Macroeconomic shocks under alternative exchange rate regimes: the Irish experience

The paper investigates the nature of Irish macroeconomic shocks and their c orrelation with German and UK shocks. A restricted VAR of real output and p rices is employed to distinguish aggregate demand and supply shocks for the three countries. To identify the role of Irish exchange rate policy two pe riods are considered: the pre-ERM period and the ERM period. The results in dicate that while the change in exchange rate policy had an effect on the n ature of demand and supply shocks, the ERM did not have the effect of incre asing the correlation of Irish shocks with Germany or the UK. Evidence of s ubstantial asymmetric shocks with Germany and the UK exist. Thus, Ireland a s a member of the EMU faces increased cost of adjustment to asymmetric macr oeconomic shocks.