The real exchange rate, fiscal policy and the current account : interpreting recent Irish experience

Abstract

This paper examines the Irish macroeconomic adjustment over the period since 1979 with particular reference to the interaction of the real exchange rate with the balance between national saving and investment. The transition from a large current account deficit to an exceptional surplus and the reversal of the growth in external indebtedness are discussed. The fact that a major reduction in absorption was achieved without a real exchange rate depreciation is attributed to a simultaneous reduction in investment spending relative to GDP and an improvement in the relative efficiency of the industrial exporting sectors. These factors are likely to continue to exert upward pressure on the Irish real exchange rate.