One month after the atrocities in the US, shock has given way to an all-pervasive sense of gloom. The US economy, already in a steep decline before the attacks, is expected to go into meltdown. The Federal Reserve has cut interest rates by 3.5 percentage points this year with no apparent effect. What impact can monetary policy have now after this calamitous event?

In Europe the situation may not be so gloomy in the short term but, where the US goes, surely the rest of the world will follow. Nowhere are the international consequences of the US downturn more obvious than in the Republic.

The implications for the Irish high-tech sector have resulted in forecasters - most notably the ESRI - running to revise their 2002 growth predictions downwards. In these dark days, can there be any possible reason for optimism?

Actually, there can. To analyse the impact of the World Trade Center attacks, one needs to consider separately the direct and indirect effects. The former - although unspeakably tragic - will be very limited from an economic point of view.

The World Trade Center and its surrounding buildings represented only 3 per cent of total office space in Manhattan and 0.3 per cent of US office space as a whole. Given that vacancy rates were higher than that, the impact will be small. Moreover, the stimulatory effects of rebuilding will negate even those.

The indirect effects are more difficult to gauge but it is clear that they will be more substantial. The IMF has estimated that a 1 per cent decline in US equity prices reduces consumption and investment growth by around 0.05 per cent over two years (as share ownership is less widespread in the Republic, the corresponding figures for here would be smaller).

Given that the broadly-based S&P 500 index is down around 12 per cent since the start of September (and 30 per cent from its peak), this should cut 0.6 per cent (1.5 per cent) off consumption and investment growth. These numbers are not large but, when you add in the psychological effect of the World Trade Center collapse on consumers, they become more substantial.

However, to counterbalance this, there will be substantive stimulatory effects from the sharp cut in interest rates that have taken place this year.

The apparent ineffectiveness of the Fed's rate cuts to date is exactly that - apparent, not real. The key federal funds rate has been more than halved, from 6 to 2.5 per cent, since January.

Given that the impact of monetary policy on the economy is subject to long lags (up to a year before it affects growth, 18 months on inflation) it is not surprising that the effectiveness seems limited so far. Monetary policy can be likened to pulling something on an elastic band: at first nothing happens, then it shoots off.

While most Americans may be suffering from an understandable lack of enthusiasm at the moment, the lower cost of mortgages and other forms of credit is having a very real impact on their pockets.

Another cause for optimism is that this crisis is lacking the key ingredient that has pushed the world into a recession during past crises: a rising oil price. When the world fell into recession in the early 1990s, it was not as a direct consequence of the Gulf War but of the sharp rise in oil prices that resulted.

While it is easy to see why the Gulf War pushed up oil prices - all the protagonists were major oil producers - this crisis has not raised the oil price to date and is unlikely to do so. Put simply, Afghanistan is not a major oil producer. Indeed, the only thing it exports in large quantities is narcotics and a sharp rise in the price of heroin is unlikely to cause a worldwide recession.

The one "joker" in the pack is the possibility that the war will escalate. If this were to happen, then the global consequences would indeed be severe. But, given the virtual unanimity in the support behind the US, it is difficult to see whom the war could escalate against. When Europe, Russia, China and most of the Middle East are behind you, who can be against you?

On the whole, therefore, there are reasons to be optimistic in this time of gloom. Nobody should question that US growth will slow - it will. Indeed, it would be surprising if the US did not contract slightly in the final two quarters of this year.

Nor should we be surprised when Irish growth slows: a slowdown was necessary even before this crisis.

Moreover, after a number of years of 8 per cent growth or more, a growth rate of only - let's say - 4 per cent in 2002 may even feel like a recession. But the US economy is likely to bounce back sharply next year and the outlook for the Republic is not nearly as dire as the ESRI and others seem to imagine.

Kevin Daly can be contacted at k.daly@ucl.ac.uk