Professor John FitzGerald:

The Senator asked me a technical question and now he is putting a very different question, which is whether you should take account of what is happening in the financial sector. Of course you should, but when Senator Barrett talked about potential output, and when he is quoting from the IMF, that is a technical issue, which is different.

To understand how the economy operates, you should actually take account of what is happening in the financial sector. I mentioned earlier the papers by Kieran McQuinn and Gerard O'Reilly in the Central Bank, a number of which showed that credit was very important in terms of explaining what happened to the housing market. One of the problems, of course, is that that was a single equation, or small model, and credit is itself endogenous. You need to embed it in a larger model in order to understand the full role. That is one of the things the ESRI is working on in collaboration with the Central Bank in developing the CoSMo model to include the financial sector. However, just because a particular model does not have the financial sector does not, as I said earlier, excuse you from looking at that. It is a very important part of the economy. The HERMES model does not have the financial sector in it but we have used it to very good effect since the crisis to look at what is happening in the Irish economy because we bring our own human capital, our own understanding of the role of the financial sector, and add it on to the model. The question of formalising that in a formal model takes time.