John Gormley (Dublin South East, Green Party)
Link to this: Individually | In context

Question 116: To ask the Minister for Finance if his Department has simulated the effects of potential external shocks on the economy; the results of these simulations; and if he will make a statement on the matter. [32944/05]

Brian Cowen (Laois-Offaly, Fianna Fail)
Link to this: Individually | In context

As a small, open economy, Ireland is heavily reliant on the international economy and external shocks have the potential to significantly reduce Irish growth. In this regard, my Department is constantly monitoring developments in the world economy. For example, in the Economic Review and Outlook, published August 2005, my Department identified a number of external risks to the economic outlook going forward, including: the high level of oil prices; the possibility of a sharp dollar correction leading to an appreciation in the value of the euro; and lower growth in the euro zone.

My Department, in partnership with ERSI, makes use of the institute's model HERMES. Using this model it is possible to simulate the impact of external shocks on the domestic economy, for example, oil price hikes and exchange rate movements. For example, in chapter 4 of the Stability Programme Update, published with the budget, my Department publishes a sensitivity update, which examines the impact of interest rate changes and growth surprises on the general Government balance, using the HERMES model.

However, it should be recognised the model-based analyses are subject to a number of limitations. Simulations rely on extrapolation from past trends in indicators such as growth, inflation, employment etc. Substantial structural change has taken place in the economy in recent years which may make the results of any simulation less accurate.