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AGGREGATION &
INTERLINKAGES:THE IRISH
CASE.




            Stephen Kinsella & G. Tiou-Tagba Aliti
                   University of Limerick, Ireland
3 STORIES OF
LINKAGES THIS
  MORNING.
1. CREDIT -> DEBT
2. PRIVATE -> PUBLIC
3. EXPECTATIONS -> REALITY
A DEMAND-DEFICIENT ECONOMY.
40,000
                                                           Final Domestic Demand, €m



30,000




20,000




10,000




    0
         1



                   1



                            1



                                     1



                                              1



                                                       1



                                                                1



                                                                          1



                                                                                    1
         Q



               Q



                        Q



                                 Q



                                          Q



                                                   Q



                                                              Q



                                                                        Q



                                                                                  Q
     04



               05



                       06



                                07



                                         08



                                                  09



                                                             10



                                                                       11



                                                                                12
   20



              20



                       20



                                20



                                         20



                                                  20



                                                           20



                                                                     20



                                                                               20
15



                                                                 EU            Ireland
11




 8




 4




 0
  2002   2003   2004   2005   2006   2007   2008   2009   2010        2011   2012


         Ireland and EU: Unemployment rates, 2002-2012
<CREDIT -> DEBT>
Modeling Aggregation and Interlinkages
n             Figure 3 Savings, Investment and Net Lending/Borrowing of
e                                     Households
 t   €billions
r       50
e       40
a
        30
A
        20
e
g       10
d         0
–
        -10
n
o       -20

        -30

        -40
                 2002   2003   2004   2005   2006   2007   2008   2009   2010   2011

                               GFCF                               Net Capital Transfers
                               Shares                             Deposits
                               Loans                              Insurance&Pensions
                               Gross Savings
n             Figure 3 Savings, Investment and Net Lending/Borrowing of
e                                     Households
 t   €billions
r       50
e       40
a
        30
A
        20
e
g       10
d         0
–
        -10
n
o       -20

        -30

        -40
                 2002   2003   2004   2005   2006   2007   2008   2009   2010   2011

                               GFCF                               Net Capital Transfers
                               Shares                             Deposits
                               Loans                              Insurance&Pensions
                               Gross Savings
n             Figure 3 Savings, Investment and Net Lending/Borrowing of
e                                     Households
 t   €billions
r       50
e       40
a
        30
A
        20
e
g       10
d         0
–
        -10
n
o       -20

        -30

        -40
                 2002   2003   2004   2005   2006   2007   2008   2009   2010   2011

                               GFCF                               Net Capital Transfers
                               Shares                             Deposits
                               Loans                              Insurance&Pensions
                               Gross Savings
Figure 3. Household Debt to Gross Disposable Income
(percent)
230
                Ireland
210             Spain
190             UK
                USA
170

150

130

110

 90

 70
   2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
      Sources: OECD; and IMF staff calculations.
Figure	
  1.	
  An	
  explosion	
  of	
  lending	
  by	
  private	
  sector	
  banks	
  led	
  to	
  Ireland's	
  current	
  malaise.	
  Source:	
  Kinsella	
  and	
  O'Sullivan,	
  2012.
Figure 2: The Turn of the Credit Cycle
Billions of 2002 euros)
 100                                                                                                                                                                                       30
                   Consumption
  95               Disposable income                                                                                                                                                       25
                   Net borrowing/lending (RHS)
  90               Net wealth (Index)                                                                                                                                                      20

  85                                                                                                                                                                                       15

  80                                                                                                                                                                                       10

  75                                                                                                                                                                                       5

  70                                                                                                                                                                                       0

  65                                                                                                                                                                                       -5

  60                                                                                                                                                                                       -10
       2002Q1




                                                    2004Q3


                                                                      2005Q3




                                                                                                                   2008Q1




                                                                                                                                                                2010Q3


                                                                                                                                                                                  2011Q3
                2002Q3
                         2003Q1
                                  2003Q3
                                           2004Q1


                                                             2005Q1


                                                                               2006Q1
                                                                                        2006Q3
                                                                                                 2007Q1
                                                                                                          2007Q3


                                                                                                                            2008Q3
                                                                                                                                     2009Q1
                                                                                                                                              2009Q3
                                                                                                                                                       2010Q1


                                                                                                                                                                         2011Q1
        Sources: CBI; CSO; and IMF staff calculations.
Modeling Aggregation and Interlinkages
Maria Woods and Siobhán O’Connell Ireland’s Financial Crisis: A Comparative Context Central
Bank of Ireland Quarterly Bulletin 04 / October 12
Modeling Aggregation and Interlinkages
</CREDIT -> DEBT>
<PRIVATE -> PUBLIC>
Figure 5. Analytical Framework

                                                                                              Balance sheet
                                                                                                 channel
                                Disposable income      Gross wealth        Collateral value




                                                                 Lending                            Inflows
    Exports                             Saving rate
                       Real
                      channel                                                Lending
                                                                             channel                  RoW

   RoW                    Consumption          Investment        Amortization                       Outflows




    Imports                 Demand
                                                                      Asset prices




 Source: IMF staff.

he lending channel lifts asset prices which in turn eases
200                                                       120%

180
                                                          100%
160

140
                                                          80%
120

100                                                       60%

80
                                                          40%
60

40
                                                          20%
20

 0                                                        0%
      2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

      Government Debt       GDP         Government Debt/GDP
180

160
          Composition of Govt. Debt.
140

120

100

 80

 60

 40

 20

 0
      2002 2003   2004 2005 2006     2007 2008 2009      2010 2011
             AF.2 Deposits   AF.33 Securities   AF.4 Loans
AN OLD SCHOOL IDEA
Modeling Aggregation and Interlinkages
Modeling Aggregation and Interlinkages
Eq 49-Eq 19: Households deposits                                   Eq16-Eq30: Gov ernment and Rest of the World bonds
                  held by Financial Corporations (Assets)                            held by Households (Assets)

126,000                                                                    650

124,000                                                                    600

122,000                                                                    550

120,000                                                                    500

118,000                                                                    450

116,000                                                                    400

114,000                                                                    350
          07:3   08:1   08:3   09:1    09:3   10:1   10:3     11:1                 07:3   08:1    08:3   09:1   09:3    10:1   10:3    11:1

                                                                                 Eq18-Eq34: Non-Financial and Financial Corporations equities
   Eq17-Eq52: Households loans from Financial Corporations (Liabilities)         held by Households (Assets)

210,000                                                                70,000

                                                                       65,000
200,000
                                                                       60,000

190,000                                                                55,000

                                                                       50,000
180,000
                                                                       45,000

170,000                                                                40,000
          07:3   08:1   08:3   09:1    09:3   10:1   10:3      11:1               07:3    08:1   08:3    09:1   09:3   10:1    10:3   11:1
                                                            shock     Empirical data v alue
Eq 50-Eq 15: Gov ernment deposits
                   held by Financial Corporations (Assets)                                   Eq7-Eq31: Gov ernment bond (Liabilities)
25,000                                                                    100,000

20,000
                                                                           80,000
15,000
                                                                           60,000
10,000

 5,000                                                                     40,000


     0                                                                     20,000
          07:3    08:1    08:3    09:1   09:3    10:1   10:3     11:1                07:3    08:1    08:3    09:1    09:3    10:1    10:3    11:1


                 Eq13-Eq55: Gov ernment                                              Eq14-Eq35: Non-Financial and Financial Corporations equities
                 loans from Financial Corporations (Liabilities)                     held by Gov ernment (Assets)

50,000                                                                      28,000

40,000
                                                                            24,000
30,000

20,000                                                                      20,000

10,000
                                                                            16,000
     0

-10,000                                                                     12,000
          07:3     08:1    08:3   09:1    09:3   10:1    10:3      11:1               07:3    08:1    08:3    09:1    09:3    10:1    10:3    11:1

                                                                Shock        Empirical data v alue
<EXPECTATIONS -> REALITY>
Modeling Aggregation and Interlinkages
Modeling Aggregation and Interlinkages
Ireland 9 year Generic Bid Yield
Modeling Aggregation and Interlinkages
</EXPECTATIONS -> REALITY>
AGGREGATION &
INTERLINKAGES:THE IRISH
CASE.




                             Stephen Kinsella
               University of Limerick, Ireland

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Modeling Aggregation and Interlinkages

  • 1. AGGREGATION & INTERLINKAGES:THE IRISH CASE. Stephen Kinsella & G. Tiou-Tagba Aliti University of Limerick, Ireland
  • 2. 3 STORIES OF LINKAGES THIS MORNING.
  • 3. 1. CREDIT -> DEBT 2. PRIVATE -> PUBLIC 3. EXPECTATIONS -> REALITY
  • 4. A DEMAND-DEFICIENT ECONOMY. 40,000 Final Domestic Demand, €m 30,000 20,000 10,000 0 1 1 1 1 1 1 1 1 1 Q Q Q Q Q Q Q Q Q 04 05 06 07 08 09 10 11 12 20 20 20 20 20 20 20 20 20
  • 5. 15 EU Ireland 11 8 4 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Ireland and EU: Unemployment rates, 2002-2012
  • 8. n Figure 3 Savings, Investment and Net Lending/Borrowing of e Households t €billions r 50 e 40 a 30 A 20 e g 10 d 0 – -10 n o -20 -30 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GFCF Net Capital Transfers Shares Deposits Loans Insurance&Pensions Gross Savings
  • 9. n Figure 3 Savings, Investment and Net Lending/Borrowing of e Households t €billions r 50 e 40 a 30 A 20 e g 10 d 0 – -10 n o -20 -30 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GFCF Net Capital Transfers Shares Deposits Loans Insurance&Pensions Gross Savings
  • 10. n Figure 3 Savings, Investment and Net Lending/Borrowing of e Households t €billions r 50 e 40 a 30 A 20 e g 10 d 0 – -10 n o -20 -30 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GFCF Net Capital Transfers Shares Deposits Loans Insurance&Pensions Gross Savings
  • 11. Figure 3. Household Debt to Gross Disposable Income (percent) 230 Ireland 210 Spain 190 UK USA 170 150 130 110 90 70 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: OECD; and IMF staff calculations.
  • 12. Figure  1.  An  explosion  of  lending  by  private  sector  banks  led  to  Ireland's  current  malaise.  Source:  Kinsella  and  O'Sullivan,  2012.
  • 13. Figure 2: The Turn of the Credit Cycle Billions of 2002 euros) 100 30 Consumption 95 Disposable income 25 Net borrowing/lending (RHS) 90 Net wealth (Index) 20 85 15 80 10 75 5 70 0 65 -5 60 -10 2002Q1 2004Q3 2005Q3 2008Q1 2010Q3 2011Q3 2002Q3 2003Q1 2003Q3 2004Q1 2005Q1 2006Q1 2006Q3 2007Q1 2007Q3 2008Q3 2009Q1 2009Q3 2010Q1 2011Q1 Sources: CBI; CSO; and IMF staff calculations.
  • 15. Maria Woods and Siobhán O’Connell Ireland’s Financial Crisis: A Comparative Context Central Bank of Ireland Quarterly Bulletin 04 / October 12
  • 19. Figure 5. Analytical Framework Balance sheet channel Disposable income Gross wealth Collateral value Lending Inflows Exports Saving rate Real channel Lending channel RoW RoW Consumption Investment Amortization Outflows Imports Demand Asset prices Source: IMF staff. he lending channel lifts asset prices which in turn eases
  • 20. 200 120% 180 100% 160 140 80% 120 100 60% 80 40% 60 40 20% 20 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Government Debt GDP Government Debt/GDP
  • 21. 180 160 Composition of Govt. Debt. 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 AF.2 Deposits AF.33 Securities AF.4 Loans
  • 25. Eq 49-Eq 19: Households deposits Eq16-Eq30: Gov ernment and Rest of the World bonds held by Financial Corporations (Assets) held by Households (Assets) 126,000 650 124,000 600 122,000 550 120,000 500 118,000 450 116,000 400 114,000 350 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 Eq18-Eq34: Non-Financial and Financial Corporations equities Eq17-Eq52: Households loans from Financial Corporations (Liabilities) held by Households (Assets) 210,000 70,000 65,000 200,000 60,000 190,000 55,000 50,000 180,000 45,000 170,000 40,000 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 shock Empirical data v alue
  • 26. Eq 50-Eq 15: Gov ernment deposits held by Financial Corporations (Assets) Eq7-Eq31: Gov ernment bond (Liabilities) 25,000 100,000 20,000 80,000 15,000 60,000 10,000 5,000 40,000 0 20,000 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 Eq13-Eq55: Gov ernment Eq14-Eq35: Non-Financial and Financial Corporations equities loans from Financial Corporations (Liabilities) held by Gov ernment (Assets) 50,000 28,000 40,000 24,000 30,000 20,000 20,000 10,000 16,000 0 -10,000 12,000 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 Shock Empirical data v alue
  • 30. Ireland 9 year Generic Bid Yield
  • 33. AGGREGATION & INTERLINKAGES:THE IRISH CASE. Stephen Kinsella University of Limerick, Ireland