Ireland Research 8

Monetary policy refers to the means through which the government, central bank or the monetary authority of a country regulates the supply of money and the cost of borrowing money in order to maintain the growth as well as the stability of the economy. A sound monetary policy therefore effectively ensures that the rate of interest correlates with the supply of money in the economy. This is achieved by establishing a direct relationship between the two whereby if the supply of money is high the interest rate is hiked so as to discourage the people from borrowing money. This ensures that the economy is not flooded with excess money so as to contain inflation. On the other hand, if there is limited supply of money in the economy, the interest rates are lowered so as to encourage domestic borrowing and hence improve the circulation of money (Tullio, 1988).

Ireland is a member of the European Monetary Union-EMU and has therefore adopted the Euro as its currency. The supply of the Euro is regulated by European Currency Board-ECB which establishes monetary policies that are to be adhered to by the member countries (Johnson, 1994). Ireland experienced economic prosperity in the decade up to 2007 with an annual average GDP growth rate of 6%. However last year the economy for the first time in ten years recorded a negative growth of -0.7%.

The construction industry and the real estate sector have been the main drivers of Ireland’s economic growth. The economy has enjoyed low interest rates as a result of the ECB monetary policies. This has encouraged domestic borrowing leading to an increase in the supply of money in the economy. The property sector has been the main beneficiary of this excess liquidity which has fuelled the demand for housing. On the other hand, the increase in the supply of money has led to high rates of inflation over the years.

With the absence of an independent monetary policy, the government has resulted to increasing taxes with the hope of curbing inflation (McDowall, 2001). It has been argued that with an independent monetary policy, the government would have been able to increase the interest rates in the economy and hence more effectively monitor the rate of inflation. With the global financial crunch, the government is in a tight spot. It has to devise ways of reviving the economy while still adhering to the ECB monetary policies. The first priority is looking into how to control inflation and then stimulate the economy through increased spending in infrastructure and attracting more foreign direct investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference:

McDowall. B. Is the sacrifice of monetary policy independence by Ireland justified by the likely benefits? 2001. Retrieved February 14, 2009 from http://www.it-director.com

Dietmar K. R., Meyer H. The Banking Systems of the EU Member States. Woodhead Publishing. 1995

OECD. OECD Economic Surveys: Ireland 2008: OECD Publishing. 2008.

Johnson. C. The Monetary Economics of Europe: Causes of the EMS Crisis. Fairleigh Dickinson University Press. 1994

Tullio G., Guitián M., Russo M. Policy Coordination in the European Monetary System.

International Monetary Fund. 1988