Category Archives: monetary economics

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The GFC did not bring down the Celtic Tiger; the Irish government did by overreacting in a crisis

Timothy J. Kehoe and Gonzalo Fernandez de Cordoba wrote this for the Annual Report Essay of the Federal Reserve Bank of Minneapolis in 2008 on the eve of the financial crisis in Ireland:

Different sorts of shocks can start financial crises. Some shocks are external to the economy. In the cases of Chile and Mexico, the shock was the increase in world interest rates and the decrease in international commodity prices, and in the case of Finland, it was collapse in trade with the former Soviet Union. Some shocks are internal. In the case of Japan, the shock was the fall in the prices of commercial real estate, and, currently in North America and Western Europe, it is the fall in the prices of residential real estate. The analysis of great depressions shows that the type of shock that starts the depression is less important than reaction to the shock by the economy and, in particular, the government.

The screen snapshot below shows that the Irish government did not bail out the depositors of a bank, they bailed out the bondholders. It is only when there is a bank run by depositors of a large bank is a financial system under threat. Bondholders are on their own.

FROM https://www.vanityfair.com/news/2011/03/michael-lewis-ireland-201103