A THEORETICAL GROWTH MODEL FOR IRELAND
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still rise by 160 per cent and 59 per cent, respectively. Hence, a tentative
conclusion we may draw from our model is that of the two channels of
openness that were emphasised in Blanchard’s discussion, the labour market
channel was by far the most important for magnifying the rate of economic
growth in Ireland.
V CONCLUSIONS
This paper has explored the consequence of capital and labour-market
openness 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. We explored
three shocks: (i) an increase in the economy’s attractiveness to foreign capital,
(ii) a reduction in labour-market distortions, and (iii) an increase in total factor
productivity. Our findings show, at the theoretical level, that the effects on
GNP of all three shocks are magnified by the openness of factor markets.
Quantitatively, however, labour-market openness appears to be vastly more
significant for growth than capital-market openness, as proxied by the
elasticity of the risk premium with respect to foreign borrowing.
Of the three shocks considered, only the TFP shock appears capable of
generating an output and employment response of the magnitude seen over
the course of the Irish boom. Labour-market shocks generate as much growth
in employment as in GDP, which rules them out as a monocausal explanation.
Of course, all three shocks are likely to have occurred simultaneously. One
channel which we have not explored but which is likely to have been of major
importance concerns the relationship between TFP growth and the increased
FDI inflows of the period. This means that our capital-market and TFP shocks
would have been related in a way that we intend to explore in future work.
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