A Theoretical Growth Model for Ireland

provided by Research Papers in Economics

The Economic and Social Review, Vol. 37, No. 2, Summer/Autumn, 2006, pp. 245-262

A Theoretical Growth Model for Ireland*

FRANK BARRY

University College Dublin

and

MICHAEL B. DEVEREUX

University of British Columbia, Canada

Abstract: Ireland is distinguished by the high degree of openness of its labour market and the
importance of foreign direct investment (FDI) in the economy. We develop a neo-classical growth
model to explore the consequence of these characteristics for the response of an economy to the
kinds of shocks that are widely recognised to have been of importance in driving the Irish boom.

I INTRODUCTION

In his discussion of Honohan and Walsh’s (2002) account of Ireland’s recent
growth performance, Olivier Blanchard suggests that the highly elastic
supplies of capital and labour available to the economy mean that exogenous
shocks will have more dramatic consequences than in the standard neo-
classical or “Solow” exogenous growth model. Such an economy, he argues, will
behave more like the AK model of endogenous growth theory which exhibits
constant returns to accumulable factors of production and in which shocks
have more substantial and long-lasting effects.

The essence of the Honohan and Walsh argument is that inappropriate
macroeconomic policies held Ireland back in earlier years, with the result that
“... convergence, when it occurred, was telescoped into a short period”. This
emphasis on ‘delayed convergence’ grounds their analysis in exogenous growth
theory. We follow them in this but take up Blanchard’s suggestion by
contrasting the performance and responsiveness to shocks of neo-classical

*An earlier version was presented at the Conference on Macroeconomic Perspectives in Honour of
Brendan M. Walsh, held at University College Dublin on 7 October, 2005.

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