Scandinavian Working Papers in Economics
Lund Papers in Economic History,
Lund University, Department of Economic History
No 261: Taking a Punt: Monetary experimentation and the Irish macroeconomic crisis of 1955-56
Darragh McLaughlin (), Eoin McLaughlin () and Seán Kenny ()
Additional contact information
Darragh McLaughlin: Faculty of Economics, University of Cambridge, Postal: Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, UNITED KINGDOM
Eoin McLaughlin: Department of Accounting, Economics, and Finance, Heriot-Watt University, Postal: Edinburgh Business School, Heriot-Watt University, Edinburgh EH14 4AS
Seán Kenny: Department of Economic History, Lund University, Postal: Department of Economic History, Lund University, Box 7083, S-220 07 Lund, Sweden
Abstract: The 1955-56 macroeconomic crisis is a central event in modern Irish history. Yet, despite this centrality, its causes are not clearly understood. In 1955-6, Ireland, which had previously followed British interest rates in lockstep as part of its fixed exchange with the latter, briefly experimented with independent monetary policy. Our contribution is twofold. First, we highlight how the Irish response was based on a misunderstanding of a run on Sterling in 1955. Second, we focus on a series of monetary shocks taking place from January 1955 to February 1956. We construct yields for Irish and UK public debt, as well as bank share indices at a daily frequency (1954-6), to test whether the shock was transmitted via financial markets. Employing an event study and testing for structural breaks, we explore the institutional framework through which the mechanisms of the crisis occurred. We find that expansionary monetary policy can only be maintained with sufficient reserves, merely postponing the inevitability of capital flight which is observed in the banking sector.
Keywords: Monetary Policy; Monetary Union; Optimum Currency Area; Trilemma
JEL-codes: E42; E52; F45; N14; N24
Language: English
47 pages, February 11, 2025
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