Economy

The ability of research to affect policy can be a waiting game

Ireland’s rampant inflation of the mid-1970s saw research insights rapidly translate to public policy

In the mid-1970s, Ireland's inflation rate was running at 18 per cent a year, similar to that of Britain’s. Photograph: iStock

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John FitzGerald
Fri May 24 2024 - 06:00

Young researchers who make and publish significant findings on the Irish economy can have concerns that their insights do not translate rapidly into policy action. However, over my career, I have learned that the transmission of research results into action takes time. Also, the interface between researchers and policymakers is important, and researchers need to translate technical analysis into findings and language that policymakers can readily understand.

Political decision-makers then have to make a judgment, not only on what may be technically the best response, but also what options are likely to be publicly acceptable, and therefore to stick. Sometimes that means going for the second or third best option, based on the evidence. The preferred answer based on research is not always feasible (or acceptable): the best may be the enemy of the good.

One example of rapid transmission of research insights into public policy occurred in the mid-1970s, when Ireland had rampant inflation of 18 per cent a year. Britain’s inflation was running at a similar rate.

By summer 1976, the Department of Finance had absorbed the lessons of this research: it was understood that concentrating on controlling wages and other costs would not solve Ireland’s inflation problem

A 1974 White Paper on tackling inflation concentrated on the need to control domestic costs, especially wage costs. The view at that time was that if unions were more reasonable, the problem would come under control. This policy response by government proved utterly ineffective in moderating inflation.

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However, a series of academic papers over the years 1974-1976 from economists Paddy Geary, Colm McCarthy and John Bradley, showed that when Ireland had a fixed exchange rate with sterling, ultimately Ireland’s (and the UK’s) inflation rates were determined by the Bank of England’s monetary policy. The logical conclusion was that Ireland’s inflation rate would remain tied to Britain’s unless the Irish pound were decoupled from sterling, and Ireland adopted a tight, and independent, monetary policy.

By summer 1976, the Department of Finance had absorbed the lessons of this research: it was understood that concentrating on controlling wages and other costs would not solve Ireland’s inflation problem, as long as we remained tied to the UK pound. Serious discussions therefore took place in the department about a possible break with sterling. As a junior official there at that time, I was asked to run the department’s economic model to tease out the implications of such a change.

While from an economic point of view, breaking the link made sense, it became clear that doing so would be complex, requiring many other changes. So the high-level discussions on the matter in the department put that decision on hold.

The work in 1976 on the economic implications of breaking the sterling link did not go to waste

Irish government bond rates, which had been higher than UK rates since independence, temporarily fell below UK rates in 1974 and 1975. This showed the markets saw lending to Ireland at that time as being safer than lending to the UK, but also suggested the possibility of the Irish pound revaluing against sterling. Financial markets also read the economic research.

The work in 1976 on the economic implications of breaking the sterling link did not go to waste. Over the following two years, at the EU level, a new initiative – the European monetary system (EMS) – was developed and negotiated. It was agreed in 1978 and started in 1979. It involved policy measures to limit future fluctuations in the exchange rates of participating members. This policy innovation reflected the problems caused by high inflation rates across many EU members in the mid-1970s, and it was designed to facilitate trade by reducing the problems caused for business due to the resulting exchange rate uncertainty.

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However, the UK declined to join the EMS. That made it almost inevitable that Ireland would have to break with sterling, as we did in early 1979. But although the 1976 discussions had envisaged a revaluation of the Irish pound against sterling, what transpired in 1979 was a devaluation of the Irish pound, against the background of a changed British economic environment and unwise fiscal policies in Ireland.

Because of misalignments in economic policy between different participating EU members, the EMS did not prove as beneficial as had been hoped. Quite frequent changes in exchange rates arose and Irish inflation remained high until the 1990s.

The EMS was superseded from 1999 by Economic and Monetary Union, and the introduction of the euro. That ended exchange rate uncertainty between participating countries – although our largest trading partner, the UK, remained outside. Economic and Monetary Union has largely been successful in containing inflation, notwithstanding the higher inflation environment of the past three years. Since 1999, inflation has averaged 2.1 per cent a year, very close to the official inflation target set by the EU.

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