Gurdgiev et al (eds ) lessons from the great recession; at the crossroads of sustainability and recovery (2016)

This chapter examines the volatility spilloversfrom the AEs’ equity markets Japan, the United States and Europe tothe four key EMs, the BRIC Brazil, Russia, India and China.. However, co

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EDITED BY CONSTANTIN GURDGIEV

Trinity College, Dublin, Ireland LIAM LEONARD California State University, Fullerton, CA, USA

MARIA ALEJANDRA GONZALEZ-PEREZ Universidad EAFIT, Medellin, Colombia

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LIST OF CONTRIBUTORS vii

CRISIS CONTAGION FROM ADVANCED ECONOMIES INTO BRIC: NOT AS SIMPLE AS IN THE OLD DAYS

TURNING TIGERS INTO PIIGS: THE ROLE OF

LEVERAGE IN THE IRISH ECONOMIC COLLAPSE

MANHATTAN IS NOT NEW YORK: THE DIVERGENT

IMPORT OF THE GREAT RECESSION AND

NATURAL DISASTERS ON NEW YORK CITY’S

FIVE BOROUGHS

UNASUR-GRID: FINANCING SUSTAINABLE

ENERGY SOVEREIGNTY WITH THE BANK OF

THE SOUTH

ON THE EFFECTS OF COMMODITIES PRICES ON

SUSTAINABLE DEVELOPMENT: AN OPPORTUNITY?

Maria Aristizabal-Ramirez and

Gustavo Canavire-Bacarreza

111

v

IMPROVING POST-2015 DEVELOPMENT

COOPERATION THROUGH DONOR SUPPORT

FOR INCLUSIVE BUSINESS

Maria Alejandra Pineda-Escobar and

Fabian Garzon Cuervo

141

THE GREAT RECESSION AND EMERGING MARKET

FIRMS: UNPACKING THE DIVIDE BETWEEN

GLOBAL AND NATIONAL LEVEL SUSTAINABILITY

AFTER THE FLOOD COMES THE TAX: EUROPEAN

ROAD TO FINANCIAL TRANSACTIONS TAX

NETWORKED SOCIAL MOVEMENTS AND THE

POLITICS OF MORTGAGE: FROM THE RIGHT TO

HOUSING TO THE ASSAULT ON INSTITUTIONS

Eva A´lvarez de Andre´s, Patrik Zapata and Marı´a Jose´

Zapata Campos

231

SOLAR ECLIPSE: INVESTMENT TREATY

ARBITRATION AND SPAIN’S PHOTOVOLTAIC

TROUBLES

CAPITAL FOR THE TWENTY-FIRST CENTURY: A

RESPONSE TO ‘CAPITAL IN THE TWENTY-FIRST

CENTURY’ BY THOMAS PIKETTY

Eva A´lvarez de Andre´s Department of Urban and Regional

Planning, Universidad Rey Juan Carlos de Madrid, Madrid, Spain

Dublin City University, Dublin, Ireland Amelia Correa Department of Economics, St Andrew’s

College, University of Mumbai, Mumbai, India

Romar Correa Department of Economics, University of

Mumbai, Mumbai, India Luis Alfonso Dau D’Amore-McKim School of Business,

Northeastern University, Boston, MA, USA

Fabian Garzon Cuervo Department of International Business,

Politecnico Grancolombiano, Bogota, Colombia

Ioannis Glinavos Westminster Law School, University of

Westminster, London, UK Maria Alejandra

Gonzalez-Perez

Department of Organization and Management, EAFIT University, Antioquia, Colombia

Constantin Gurdgiev Trinity College Dublin, The University of

Dublin, Dublin, Ireland

vii

Carolina Herrera-Cano Business School, EAFIT University,

Antioquia, Colombia Elizabeth Marie Moore Department of Political Science,

Northeastern University, Boston,

MA, USA Barry Murphy Trinity College Dublin, The University of

Dublin, Dublin, Ireland Tony Phillips Postgraduate Department, Economics

Faculty (FCE/UBA), University of Buenos Aires, Buenos Aires, Argentina

Maria Alejandra

Pineda-Escobar

Department of International Business, Politecnico Grancolombiano, Bogota, Colombia

Carolyn E Predmore Department of Marketing, Manhattan

College, Riverdale, NY, USA Margaret Soto Department of Political Science,

Northeastern University, Boston,

MA, USA Lauren Trabold Department of Marketing, Manhattan

College, Riverdale, NY, USA Barry Trueick Trinity Business School,

Trinity College Dublin, Dublin, Ireland

Patrik Zapata School of Public Administration,

University of Gothenburg, Gothenburg, Sweden Marı´a Jose´ Zapata

Campos

School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden

While writing about the ‘renewed interest’ in inequality as extolled by ing economists such as Piketty and Stiglitz, World Bank Senior AdvisorMarcelo Giugale1 has outlined four reasons as to why economists in thepost-recession era are so interested in the wealth gap in society These fourreasons include an uncertainty about how much inequality is acceptable,how much we should be concerned for future generations, how practicalour solutions to inequality actually are and the fact that our own attempts

lead-to improve our lives are contributing lead-to an overall inequality acrosssociety

The substance of Giugale’s argument reflects on the type of ity’ we are attempting to highlight in this volume of Emerald’s Advances inSustainability and Environmental Justice Series While he acknowledgesboth Piketty’s concern that the primary owners of capital will continue tohold the vast majority of wealth globally as well as Stiglitz’s focus on theproblems such truths hold for wealth creation and wealth equality in theUnited States, Giugale reminds his readers that we are also traditionallynot in favour of forced equality as a remedy for financial imbalances.Therefore, the question remains, what is the best way to tackle inequality

‘sustainabil-in an endur‘sustainabil-ing, just and susta‘sustainabil-inable manner?

This volume contains a number of attempts to address this primaryquestion of the post-recession era With contributors from across the globeand from a diverse set of disciplines, this collection provides a comprehen-sive set of chapters which will outline exactly what are the “Lessons fromthe Great Recession” for nation states and supra-state agencies alike Thisvolume outlines various concepts of sustainability in the post-recession andpost-bailout world These understandings are built around aspects such asfiscal, economic and social sustainability; financial sustainability and envir-onmental sustainability Each chapter details the relationships of sustain-ability that have emerged in the years since the 2008 global recession, as

1

Giugale (2015)

ix

competing regions, nations and economies have undergone renewedeconomic restructuring on a global basis.

Therefore, this book examines various financial, economic and socialresponses to the recession We see these themes in many chapters in thebook For instance, Gurdgiev and Trueick present the results of a compre-hensive literature survey and supportive empirical assessment of the poten-tial impacts of the Financial Transactions Tax recently adopted by theEuropean Commission in response to the significant financial sector misal-locations arising from the Global Financial Crisis The book also examinesone EU one nation state as a case study Corbet’s contribution examinesthe roles and challenges for the Irish economy in the aftermath of the col-lapse of the Celtic Tiger and the onset of the 2008 economic crisis.Specifically, it reviews the role that Government, the Central Bank ofIreland, and the Financial Regulator had before, during and after thecollapse of both the Irish banking system and property market

Predmore and Trabold discuss the twin impacts of natural disasters andeconomic rationalization on New York’s boroughs Specifically, they detailManhattan’s resilience to the recession and how this has impacted the othercity boroughs, such as the housing crisis in Staten Island and Queensfollowing Hurricane Sandy, and unemployment rates in the Bronx

In addition, this volume presents a South American perspective on theenvironmental and financial sustainability of energy integration incorporat-ing recent financial lessons from the US and Europe An illustrative projectcalled UNASUR-GRID is presented to highlight new thinking on fundingecologically sensitive development and regional energy sovereignty byway of a new regional development bank for that region The volumealso examines the opportunities presented by Commodity Prices andSustainable Development, demonstrating a non-linear effect of commodityprices on our index, while low and middle-income countries display a posi-tive effect of prices on our HSDI, with smaller effects in the former ones,

as high-income countries do not seem to exhibit a significant effect

In addition, Maria Alejandra Pineda-Escobar and Fabian GarzonCuervo first reflect upon shifts perceived in development cooperationsince the Great Recession, and analyse how foreign donors have engagedmore widely with businesses for addressing global development challenges.The concept of inclusive business is then introduced, describing howalthough the development community acknowledges the potential of theprivate sector as a driving force for development, inclusive business hashitherto been developing, to a great extent, aside of broader developmentefforts The volume includes a call for a better cohesion between

development cooperation, on the one hand, and inclusive business, on theother hand.

This contributes to the existing post recessionary debate on developmentcooperation, in which, (i) traditional aid and partnership effectiveness arebeing revised and, (ii) the role of the private sector in development is beingemphasized It builds on recent discussions that call for a more strategicuse of development cooperation to leverage other development-orientedflows, particularly those coming from the private sector

This volume goes on to dissect the differences between global andnational sustainability expectations This highlights different sets of pres-sures faced by emerging market firms, both domestic and multinational.The section contends that emerging market multinational enterprises(EMNEs) are incentivized to uphold corporate social responsibility prac-tices to a greater degree than domestic firms from emerging markets.Herrera-Cano and Gonzalez-Perez also demonstrate how SociallyResponsible Investment (SRI) could represent a powerful tool (trust reco-vering in political and economic institutions) in the case of failure or stag-nation of economic and financial growth The purpose of their chapter is toevaluate the current status of socially responsible investments (SRI) in thecontext of the recent financial and economic crises The main objective ofthis analysis is to consider the different benefits and challenges that thistype of investment transactions bring into the international economy, andhow SRI entrance could represent a major benefit not only for investors adifferent approach to corporate sustainability, but as an important possibi-lity in times of global economic and political crisis

The volume also looks at the impact of the recession on the family home

in Spain In the aftermath of the Great Recession, over 500,000 familieshave been evicted from their homes since Spain’s property market crashed

in 2008 Authors Eva A´lvarez de Andre´s, Patrik Zapata and Marı´a Jose´Zapata Campos examine the response of Spanish local communitiesthrough the emergence of a networked social movement, Plataforma deAfectados por la Hipoteca (PAH), endeavouring to build a more sustain-able future through upholding the right to housing The contributors exam-ine the ability of the PAH social movement to uphold the right to housingand prompt social and institutional change in Spain Gurdgiev andMurphy also discuss the European journey to a Financial TransactionsTax

In addition, Ioannis Glinavos examines the regulatory framework rounding the effects of actions in investment treaty tribunals against states

sur-in the European Periphery His chapter examsur-ines the case of Spasur-in and the

multiple actions brought against it due to changes in support structures forthe production of solar electricity The aim of his analysis is to test whetherinvestor state dispute settlement (ISDS) can further the cause of environ-mental sustainability In addition, Amelia Correa provides a response toThomas Piketty’s arguments in his Capital in the 21st Century, as his text issubjected to close scrutiny The history is downplayed and the nascentmacroeconomics fleshed out and extended, as subjects such as sustainabilityare considered.

As Series Editor, I am extremely pleased with the depth and breadth ofour international survey of the post-recession era My thanks are extended

to all our contributors, my co-editors for this volume Constantin Gurdgievand Maria Alejandra Gonzalez-Perez, as well as our Commissioning Editor

at Emerald Jade Turvey We look forward to bringing you further volumes

on relevant topics as part of the future growth of the Advances inSustainability and Environmental JusticeSeries

Liam LeonardSeries Editor

REFERENCEGiugale, M (2015) Piketty, Stiglitz and our renewed interest in inequality Huffington Post, Politics: The Blog Accessed on October 10, 2015.

ADVANCED ECONOMIES INTO BRIC: NOT AS SIMPLE AS IN

THE OLD DAYS

Constantin Gurdgiev and Barry Trueick

ABSTRACTPurpose
At the onset of the Global Financial Crisis in 2007
2008,majority of the analysts and policymakers have anticipated contagionfrom the markets volatility in the advanced economies (AEs) to theemerging markets (EMs) This chapter examines the volatility spilloversfrom the AEs’ equity markets (Japan, the United States and Europe) tothe four key EMs, the BRIC (Brazil, Russia, India and China)

Methodology
The period under study, from 2000 through mid-2014,reflects a time of varying regimes in markets volatility, including theperiods ofdot.combubble, the Global Financial Crisis and the EuropeanSovereign Debt Crisis, the Great Recession and the start of the Russian-Ukrainian geopolitical crisis To estimate volatility cross-linkagesbetween the AEs and BRIC markets, we use multivariate GARCH-BEKK model across a number of specifications

Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery Advances in Sustainability and Environmental Justice, Volume 18, 1
20

Copyright r 2016 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 2051-5030/doi: 10.1108/S2051-503020160000018001

1

Findings
We find that, the developed economies weighted return tility did have a significant impact on volatility across all four of theBRIC economies returns However, contrary to the consensus view, therewas no evidence of volatility spillover from the individual AEs ontoBRIC economies with the exception of a spillover from Europe to Brazil.The implied forward-looking expectations for markets volatility had astrong and significant spillover effect onto Brazil, Russia and China, and

vola-a wevola-aker effect on Indivola-a

Practical Implications
The evidence on volatility spillovers from theAEs markets to EMs puts into question the traditional view of financialand economic systems sustainability in the presence of higher orders ofintegration of the global monetary and financial systems Overall, datasuggest that we are witnessing less than perfect integration betweenBRIC economies and AEs markets to-date can offer some volatilityhedging opportunities for investors

Originality
Our chapter contributes to the growing literature on tility spillovers from the AEs to the EMs in a number of ways Firstly,

vola-we provide a formal analysis of the spillovers to the BRIC economiesover the periods of recent crises Secondly, we make new conclusionsconcerning longer-term spillovers as opposed to higher frequency volati-lity contagion covered by the previous literature Thirdly, we consider anew channel for volatility contagion
the trade-weighted AEs volatilitymeasure

Keywords: GARCH-BEKK; volatility; volatility spillovers; emergingmarkets; advanced economies; Global Financial Crisis

INTRODUCTIONThe importance of global financial markets integration and its effect on theasset allocation decisions has become a heavily researched area of financialliterature in recent years Starting with the Global Financial Crisis of2007
2008 (GFC), the emerging markets (EMs) have attracted significantattention of analysts and investors, at first, as a preferred geographicaloption for diversifying out of the individual advanced economies (AEs)most severely impacted by the GFC and, subsequently, as a hedge againstcontagion across the AEs’ markets in general Since the long-term sustain-ability of investment allocation and markets hinges on existence of viable

options for investors to diversify out of high volatility markets, alongsidewith the trend toward globalization of investment portfolios, the GFC-related experience in the EMs gives rise to the importance of better under-standing the nature of volatility spillovers between the AEs and the EMs.Previous literature looked at the spillovers from the AEs onto the EMsfocusing primarily on Asian EMs There has been little evidence of volati-lity spillovers from the United States or Europe into Asian economiesacross the majority of findings covering the Asian Crisis of the late 1990s.However, more recent research has uncovered some indications that thesefindings require updating in the light of the global experiences in the wake

of the GFC and subsequent sovereign debt crisis in the AEs

The relationship between the developed and emerging economies hasbeen further under scrutiny with recent quantitative easing policies imple-mented in the majority of the AEs During recent years, lower interest rateswere set in an attempt to increase borrowing and stimulate economicgrowth, fueling strong cross-border flows via carry trades and direct invest-ment between the AEs and the EMs It is widely believed that this sort ofmonetary policy in the developed world has had a negative impact on theemerging economies (Aizenman, Hutchinson, & Binici, 2014) This raisesserious questions about financial and economic sustainability of the EMs’growth models reliant on direct and portfolio investment inflows fromthe AEs in the presence of accommodative monetary policy regimes inthe latter

On a more recent horizon, in the past year, there has been widespreadexpectation that the United States Fed will revert to increasing interestrates This too presents a risk of a negative spillover to the EMs, as argued,for example, inAizenman et al (2014)in the context of the Asian markets

In simple terms, the current environment of increased long-term marketsuncertainty, extensive monetary policy dislocations and continued trendtoward financial markets integration worldwide leaves us with an interest-ing question of whether lower frequency AEs’ markets returns volatilitydoes spillover into EMs To gain a deeper insight into this matter, we use amultivariate GARCH model to determine whether there were return spil-lovers, the volatility spillovers and direct contagion from market sentimentfrom the AEs, as represented by Japan, Europe and the U.S., on the EMs,represented by Brazil, Russia, India and China

The time period for our study covers data from the start of 2000 throughmid-2014, which gives an up-to-date view of the relationship between emer-ging and developed markets encompassing varying degrees or regimesvolatility For example, the sub-prime financial crisis and the subsequent

GFC, the European sovereign debt crisis, and the FED-driven taperingexpectations
all occur during this time The geopolitical crisis betweenRussia and the Ukraine is also partially reflected in the data, offering aninsight into another channel for potential increase in markets volatilitylinkages across Europe, the United States and Russia.

In terms of our econometric modeling, the multivariate GARCH modeland multivariate GARCH-BEKK model were set up to examine how each

of the following affect the EM returns of each of the BRIC countries:(i) the effect of individual developed market volatility, as represented bythe variance of the United States, European and Japanese markets returns;(ii) the effect of the forward-looking global market risk sentiment, asmeasured by VIX, that allows us to capture medium-term perceptions ofthe expected global risk environment; (iii) and the volatility in the index ofAE-weighted average returns In this, our study is similar toLi and Giles(2014)methodology, although we use distinct measures of volatility and adifferent model specification In addition, in contrast with other studiesthat focus primarily on shorter-term volatility spillovers (daily data orhigher frequency data), we use weekly data to uncover lower frequencyvolatility transmissions

The results of our model estimation highlight three main findings.Firstly, we show that an increase in the aggregate developed economiesmarkets returns volatility leads to an increase in the BRIC country returnsvolatility for the period in question This highlights the inter-dependencybetween the BRIC economies and the developed economies in terms ofmarkets volatility Secondly, the VIX index has significant negative correla-tion at the 1
5% level with returns in Brazil, Russia and China and at10% level for India This leads to the conclusion that the BRIC marketscannot be viewed as a hedge against VIX-implied expected future globalmarkets volatility Finally, this study shows that, with the exception ofEurope and Brazil, individual AEs’ markets volatility does not act as animportant channel for volatility spillovers to the BRIC economies.However, there is no evidence of volatility spillover from Japan or theUnited States into Brazil and this there is no evidence of a volatility spil-lover from Japan, the United States or Europe into Russia, India or China.These findings, therefore, indicate that while the BRIC nations areaffected by market sentiment, the market integration between individualAEs and BRIC nations was not of a high enough degree to create country-specific channels for volatility transmission Coupled with this the size ofthe BRIC economies, BRIC markets appear to be large enough to absorb

volatility shocks spillovers from individual AEs, but not large enough toavoid spillovers from the AEs on the aggregate.

The evidence on volatility spillovers from the AEs markets to EMs putsinto question the traditional view of financial and economic systems sus-tainability in the presence of higher orders of integration of the globalmonetary and financial systems Overall, data suggest that we are witnes-sing less than perfect integration between BRIC economies and AEs mar-kets to-date can offer some volatility hedging opportunities for investors

By virtue of their large size and rapid growth, it appears that for quitesome time (between 2008 and 2014) the BRIC economies have been betterinsulated from the GFC and the Sovereign Debt Crisis, while remainingintegrated into global trade and investment flows

The rest of this chapter is organized as follows The section “TheKnown Knowns and Unknowns” summarizes some of the key literature onthe subject of spillovers/contagion across the AEs and EMs Followingthis, the section “Data and Methodology” presents the data and methodol-ogy, while the section “Main Findings and Analysis” covers details ofeconometric results The last section summarizes the findings

THE KNOWN KNOWNS AND UNKNOWNS

Modeling the volatility spillover from AEs to EMs based on indexed assetsreturns has been a popular area of study in recent years The financial crisishighlighted the importance of volatility analysis in terms of constructingdiversified portfolios, especially within the context of the EM returns Inbasic terms, the literature covering volatility spillovers can be divided intotwo categories: the nature of contagion and the channels for contagion.Financial contagion became a prominent subject of academic researchparticularly following periodic markets volatility in the late 1980s and theEMs’ crises of the 1990s.Beirne, Caporale, Schulze-Ghattas, and Spagnolo(2009) reference the 1987 stock market crash in the United States, theExchange Rate Mechanism crisis and the EM crisis of the 1990s as themajor periods on which much of the pre-GFC research has been focused

Ng (2000) examines the volatility spillover from Japan and the UnitedStates to six Asia-Pacific economies, documenting the lack of empiricalevidence of U.S markets spillover to Asian stock markets, with Japanesestock market volatility being the only driver of contagion

Subsequently,Li (2007)used a multivariate GARCH model to examinethe relationship between stock markets of China, Hong Kong and theUnited States The findings again confirmed lack of relationship concerningreturn and volatility spillovers between the United States and China for theperiod studied Notably, no papers in this literature class consider spil-lovers from three major AEs (United States, Japan and Europe) to a group

of major EMs (BRIC) for the pre-GFC period

The lack of evidence concerning volatility spillovers from the UnitedStates to Asia is contradicted by more recent data arising from the GFC

Li and Giles (2014) examined the volatility spillover from developed stockmarkets, Japan and the United States, to Asian EMs, China, India,Indonesia, Malaysia, the Philippines and Thailand The data span 20 years

so as to include both the Asian EM crisis and the 2007 sub-prime crisis.The authors implement a multivariate GARCH approach to find that theUnited States has unidirectional spillovers on both Japan and the EMs inquestion However, spillovers are only significant between Japan and theAsian EMs in the last five years, with the U.S significance only presentduring the Asian crisis One issue with the study is that by pursuing widertime horizon, the model is treating equivalently higher liquidity markets ofmid-2000s through today and low liquidity markets prior to the Asianfinancial crisis Another issue is that Li and Giles (2014) findings do notextend to the BRIC economies which became dominant drivers for globalgrowth in the 2000s

A first look at the BRIC markets indicates that there should be a highlevel of integration between them and the AEs.Bhar and Nikolova (2007)

examine the integration of BRIC countries on a regional and global bases.The World Index Returns was found to have a significant positive impact

on the markets volatility in Brazil, Russia and India, as well as a significantnegative impact for China Bhar and Nikolova (2007) data set covers theperiod directly prior to the GFC raising a question as to whether theirresults still hold in current conditions

Whilst there has been a number of studies centered on specific EMs, thefirst study to implement a large-scale examination of EMs in general can befound in Beirne et al (2009) The paper examines the volatility spilloverfrom mature to emerging stock markets and also tests the transmissionmechanism changes during turbulences in these mature markets Beirne

et al (2009) data cover 41 EM economies using a trivariate BEKK model The use of the Chicago Board of Options Exchange Index

GARCH-or VIX allows the authGARCH-ors to identify periods of increased volatility as ameans of determining market turbulence The authors conclude that there

was evidence of volatility spillover between AEs and EMs, and that thespillover changed during the periods of market turbulence While this chap-ter provided a good insight into the subject, the number of EM economiesused made it difficult to link results to BRIC economies In addition, thestudy covers only limited sub-period of the GFC and does not cover theperiod of subsequent shocks, such as the sovereign debt crisis.

Beyond direct volatility spillovers testing, the literature looks at anumber of channels that contribute to volatility contagion

Uribe and Yue (2006) examine the complex relationship between U.S.interest rates, country spreads and business cycles in EMs Using a VARmodel the authors found that shocks to the U.S interest rate help explainsome 20% of the subsequent changes in the of EMs’ fundamentals In addi-tion, country spreads, world interest rates and business conditions in theexamined EMs impact EMs returns

More recently, Foley-Fisher and Guimaraes (2013) and Zhu & Yang(2013) published similar studies on the spillovers from the U.S monetarypolicy to the EMs, finding negative correlation between the U.S real inter-est rates and sovereign default risk of the emerging economies (Foley-Fisher & Guimaraes, 2013), and the spillover from the U.S QE to higherinflation in China (Zhu & Yang, 2013)

Mensi, Hammoudeh, Reboredo, and Nguyen (2014)examined the globaleconomic factors which influence EM performance, including BRICS (BRICinclusive of South Africa) The variables include changes in global stockmarket, U.S economic policy uncertainty, and VIX, which acts as a measurefor stock market uncertainty The findings show that BRICS markets exhibitasymmetric dependence with the global stock market When tested post-crisis, the results produce the same level of dependence VIX is insignificant

in a bull market but is said to influence returns in a bear market

Further to this, Sarwar (2012) examines the usefulness of VIX as aninvestor fear gage for BRIC countries As would be expected, the VIX acts

as an investor fear gage for the United States but along with this there isalso sufficient evidence to suggest it does the same for Brazil, India andChina A strong negative contemporaneous relationship is found in eachcase indicating that the expected volatility of S&P 500 has a significantimpact on three of the emerging BRIC economies The study was based on

a period of 1993
2007 and so it will be interesting to examine whether thisrelationship is still significant in a more up-to-date timeframe, especially as

Dimitrioua, Kenourgiosb, and Simosa (2013) show that there is a higherco-dependence between EMs and AEs markets in bullish market periodsrather than in bearish

Overall, this chapter contributes to the literature on the topic of lity spillovers through both the use of a different timeframe (covering theperiods pre- and post-GFC) and contrasting representation of the EMs(BRIC) In addition, most recently the unrest between Russia and theUkraine has caused increased volatility across the United States, Europeand of course Russia itself Beyond this, the present study contributes tothe volatility spillover literature by considering lower frequency spillovers(using weekly data as opposed to daily data pursued in the majority ofstudies).

volati-DATA AND METHODOLOGY

Data

The variables used for this study include weekly data from January 1,

2000 through June 10, 2014 for the following indices: Ibovespa (Brazil),Micex (Russia), Sensex (India), Hang Seng (China), Eurostoxx (Europe),S&P 500 (U.S.), Nikkei (Japan), VIX (global market sentiment indicator).Use of weekly, as opposed to higher frequency, data allow us to smoothout daily volatility (or higher frequency volatility), while retaining thefeature of the data that reflect changes in the newsflows and markets re-pricing based on changes in longer-moving fundamentals (Gagnon &Karolyi, 2006) In addition, as noted in Li and Giles (2014) lower fre-quency data alleviate the issues relating to non-coincidence of tradingdays across geographies, as well as the time zones differences, that can beacute in the case of such geographically dispersed countries as BRIC.Finally, French and Roll (1986) show that weekly data allow to controlfor weekend effects
a problem non-trivial in the case of GFC-relatedextreme volatility

When studying the indices of the EMs, it is clear that by mid-2014, onlyIndia has managed to achieve a full recovery relative to pre-GFC periodpeaks, reaching record highs in 2014 The cause of this may beattributable to the use of a stimulus package by the Indian government andthe promise of major economic reform policies brought in by the newlyelected Prime Minister Narendra Modi

Overall, our data sample covers the following periods of markets regimeshifts: thedot.combubble of 2000
2001, the sub-prime crisis in the UnitedStates and the GFC of July 2007
June 2009, the European sovereign debt

crisis on March 2010
December 2013, the Great Recession 2008
2012,the FED-tapering announcement starting with mid-2014 and the unrestbetween Russia and the Ukraine starting from January 2014, all occurredduring this time In addition, the sample covers the period of relativelylow volatility and stable trends in the markets from mid-2003 though 1Q

2008 In addition, modeling volatility spillovers require inclusion of timeperiods of both low and high volatility to gain accurate results (as per

Beirne et al., 2009; Li & Giles, 2014), strongly justifying the periodselected as appropriate

Fig 1illustrates these periods’ timing by referencing VIX

For the purpose of this study, weekly data from Ibovespa (Brazil),Micex (Russia), Sensex (India) and Hang Seng (China) were converted topercentage changes so as to allow the data from each country to be morecomparable This removes any ambiguity in regard to differing units ofeach index As in Li and Giles (2014), continuously compounded dailyreturns are calculated for each of the indices and displayed in percentages

Pt= Stock Market Price Index at Time t

rt= Continuously Compounded Daily Return of Stock Market

We use Li and Giles (2014) approach for correcting for missing tions where such misses were caused by differences in working days.Overall there are 748 observations for each market with summary ofrelated statistics shown inTable 1

observa-Over the period covered in the study, Brazil, Russia, India and China allhave positive mean returns Overall Russia has the highest standard devia-tion (one measure of volatility) attributable to its reliance on the oil andgas industry and high exposure in the equity markets index to bankingshares All of the emerging economies, excluding Russia, have a negativeskew meaning that the returns are not symmetric Russia, on the otherhand, has a positive skew indicating that a large positive return is morecommon than a large negative return In general, it is said that investorswould prefer a positive skew As would be expected, the data for all indicesare leptokurtic; so that the returns are fat tailed

Fig 1 VIX, Close Prices Source: Author own calculations based on data from Bloomberg.

For the AEs, we used the following indices: S&P 500 for the UnitedStates, Eurostoxx for Europe and Nikkei for Japan Consistent with theemerging economies a total of 748 observations were used based on weeklydata comprising five trading days per trading week Uniform with theEMs’ data, the continuously compounded daily returns were calculated foreach of the developed economy indices and displayed in percentages usingformula (1).

In the case of the AEs, a combined data set was created to represent anoverall AE with weighted average return for each of the BRIC countries

To achieve this the three AEs indices above were weighted based on thecountries total trade from each year with each of the BRIC countries Thisallows a more accurate representation of the macroeconomic links betweenindividual BRIC markets and the overall AEs’ index The data for tradeflows were collected from the World Bank for each year from 2000 to 2012.For 2013 and 2014, an average of the previous years was used, as this infor-mation was not yet available at the time of data compilation Table 2

shows the statistical properties of the AEs data

Table 1 Summary Statistics Emerging Markets

Table 2 Developed Economy Statistical Properties

Europe is the only economy with a negative mean return for the period.Similar to the emerging markets (ex-Russia), all of the developed marketindices have a negative skew
a sign of the impact of the GFC
andleptokurtic.

Overall the EMs (Table 1) have higher mean returns than that of theAEs (Table 2) This may be due to the massive growth experienced bythe BRIC nations in the past number of years The standard deviations ofthe developed market economies are on average less than that of the EMsand so it could be said that they are slightly less volatile

Along with the volatility of the weighted average returns from the oped economy and the individual developed economy volatilities, the lastvariable used was the Chicago Board of Options Exchange Index or VIXindex The VIX measures investors’ expectations of market volatility

devel-30 days forward For the purpose of this project, VIX will be used as a level

of global market volatility and global market sentiment

Sarwar (2012) found that the VIX was more of and investor fear gagethan a positive investor sentiment measure for the United States, Brazil,China and India This means that as the VIX index increased the aforemen-tioned stock markets declined, denoting that investors were wary of theincreased volatility For the purpose of our study the percentage movement

in VIX was calculated for each weekly period so as to remain consistentwith the previous variables used

Methodology

The purpose of this chapter is to examine the volatility spillover from thedeveloped market into the BRIC economies As seen in past literature, themost appropriate model for this is a multivariate GARCH (p,q) model.Based on separate AR model tests, we found that, whilst daily data requirehigher lags (up to three periods lags for some countries), weekly data can

be sufficiently modeled using one period lag as discussed in Li and Giles(2014)

Overall, the GARCH(1,1) type of model has been used extensively whendealing with financial research, especially in the BEKK specification(Engle & Kroner, 1995) as exemplified byJoshi (2011) and Li and Giles(2014), among others On the other hand, reliance on weekly data reducesthe model power when it comes to using higher lags Fortunately, ourARCH and AR tests suggest that first-order lags are sufficient for thedata used in the present study

The GARCH models for each of the BRIC countries were run over anumber of specifications with slight changes to the composition of theexplanatory variables Tested specifications included direct effects of VIXand AEs returns volatility on our dependent variable Based on standardtests, we narrowed the set of models down to two key specifications pre-sented below.

First, the model was be run for each of the emerging economies ing U.S volatility (vol_u), European volatility (vol_e), Japanese volatility(vol_j) and the AE-weighted average return (adv_er) but excluding VIX.Subsequently, we run the model including VIX Inclusion of VIX was con-sistent with improved Durbin
Watson statistic (which ranged, across ourestimates under BEKK specification, from 2.08 to 1.94) and with improvedLjung Box Q statistics (all confirming the sufficiency of the GARCH struc-ture chosen in the model for every estimated country)

includ-The equation covering both reported models is:

Y= α0þ α1X1t− 1 þ α2X2t− 1 þ α3X3t− 1 þ α4X4t− 1 þ α5X5

where

Y : Emerging Market Return;

X1t− 1 : Lagged U:S: Volatility;

X2t− 1 : Lagged Europe Volatilty;

X3t− 1 : Lagged Japan Volatilty;

X4: Advanced Economy Weighted Average Return; and

X5t− 1 : Lagged VIX

Ex Ante Expectations

Here, we provide the ex ante expectations of the coefficients for each of thevariables used in each of the models based on economic intuition andprevious research presented in the section “The Known Knowns andUnknowns.”

As of 2014, Brazil is the seventh largest economy in the world, and so, itwould be unrealistic to assume that it is not heavily integrated with at leastsome of the world’s largest AEs For this reason, it is expected that thereturns volatility to the Ibovespa Index in Brazil will have a significant rela-tionship with volatility of the AEs-weighted average return As for volati-lity, a spillover from the United States and/or Europe would not be

a surprise because of the dominance of the U.S economy in the WesternHemisphere, and due to Brazil’s large trading and investment links withEurope (European Commission, 2014).

In the case of Russia, it would again be expected that the AE-weightedaverage returns volatility variable would have a statistically significant rela-tion to Russian Index returns volatility.Bhar and Nikolova (2007)found apositive significant impact from World Index Returns on Russian volatility

In regards to spillover, it would be expected that there would be a spillover

of volatility from Europe to Russia This is expected as Europe relies ily on Russia for the supply of commodities, nearly 80% of Russianexports flow into the EU (Patterson, 2013)

heav-India, the 10th largest economy in the world should have a significantrelationship with the AE returns Currently, the Sensex Index is at recordlevels and has experienced a bull market since the crash in 2008 Its positiveperformance has been similar to the United States and in 2013 India’s big-gest export partner was also the United States For these reasons it may beobserved that there is a volatility spillover from the United States to India.Finally, as can be seen in previous literature, China’s returns have beennegatively correlated with the volatility spillover effects of the World indexreturns (Bhar & Nikolova, 2007) Although the sheer size of the Chineseeconomy, the second largest in the world in terms of GDP, would indicatethat it would be positively correlated and have a significant relationshipwith the AEs returns China is heavily reliant on exports to the rest ofthe world and thus is heavily globalized Past literature cited earlier hasindicated no volatility spillover from the United States to China or otherAsian countries and so we should not (ex ante estimation) expect a volati-lity spillover from any of the developed economies

MAIN FINDINGS AND ANALYSIS

This chapter sets out to examine the relationship between the developedmarkets and the BRIC markets in the context of potential shocks and vola-tility spillovers The econometric model was set up to examine how each ofthe following affect the EM returns of BRIC countries: (i) the effect of indi-vidual developed market volatility, as represented by the variance of theU.S market, European market and the Japanese market; (ii) the globalmarket sentiment, as measured by VIX and (iii) and AE–weighted averagereturns

The general model as has been discussed above examined how individualdeveloped economy volatility and aggregate returns impact the EM returns

of all four of the BRIC nations Prior to running the model, we performedstandard unit root tests The results confirmed stationarity of the returnsseries After that, the standard GARCH (1,1) model was run for each ofthe BRIC countries The model includes the lagged volatility from theU.S., Japan and Europe and the AE-weighted average return as indepen-dent variables Subsequently, we estimated GARCH-BEKK specificationfor the same lag structure and each GARCH specification.Table 3presentsthe results of GARCH estimations across two models

Table 3 Estimation Results (Dependent Variable: CER)

For Brazil, the only significant channels for volatility spillovers areEuropean index volatility and AE-weighted average return The EU isBrazil’s first trading partner with 21.4% of total trade (EuropeanCommission, 2014) In addition, many European banks have substantialexposures to Brazil For example, Brazil contributed 23% of 2013 earnings

to Banco Santander, a Spanish bank (Slater, 2014) VIX also has a cally significant effect on volatility environment spillover from the globalrisk perceptions to Brazil’s markets Furthermore, inclusion of VIX doesnot invalidate significance of other spillovers channels, suggesting that VIXacts as an independent, forward-looking channel for transmission of globalshocks to Brazilian equities market

statisti-Unlike Brazil, Russia has only one significant variable, the AE-weightedaverage return in the model absent VIX effects As has been mentionedabove it was expected that the AE variable would be significant, as Russiawould have a strong correlation with European markets through its energy-intensive exports and its investment/banking channel proximity to Europe.However we find the lack of direct volatility spillover from Europe A possi-ble reason for this is that Eurostoxx index is comprised of leading blue chipEuropean equities Thus, Eurostoxx coverage does not coincide withRussian indices coverage (the latter being concentrated on banking andenergy sectors) Surprisingly, whilst AEs’ volatility significance is weaker inthe presence of VIX effects, VIX effects appear to be more pronounced inthe case of Russia than in the case of other BRIC markets This can bereflective of the strong effect of multi-period supply and exports contracts

in the energy and banking sectors that dominate Russian financial marketsand which can be expected to have stronger links to longer-range forwardmarkets outlook
incorporated into VIX
and less strong links to thecontemporaneous volatility in the AEs’ markets

Similar to the Russian economy, there is no volatility spillover evidentfrom the U.S., Europe or Japan to India The AE-weighted average return

is significant at a 5% level in the BEKK specification This was expectedbecause of India’s integration with global markets and its strong links asservices trade partner with a number of the AEs As was mentioned earlierEurope has a substantial exposure to the EMs lending in excess $3 trillion

as of 2014, which is four times more than the United States In particular,HSBC and Standard Chartered Bank hold large exposures to India and thetwo banks were largely less impacted by the GFC than their more Europe-focused counterparts However, as the results show, the banking channel inthe case of India was not large enough to indicate a volatility spillover.Finally, VIX is weakly linked to volatility in the Indian market, possibly

due to lower degree of global integration of Indian equity markets ingeneral.

Consistent with Russia and India, data for China do not show any nificance for volatility spillover from the United States, Europe or Japan.The AE-weighted average return is, however, significant at a 10% level,indicating that there are positive linkages between AEs’ volatility andChinese market volatility The global nature of Chinese markets linkages isalso confirmed by the significant coefficient for volatility spillover channelvia VIX However, overall results for the Chinese markets are weaker thanthose for other BRIC economies One possible reason for this is that China

sig-is on course to replace the United States as the world’s largest economyand, thus, it may be large enough to withstand volatility shocks in othereconomies

The findings for the direct effects of the U.S market volatility are sistent with Ng (2000) Taken together with our other country/region-specific findings (for Europe and Japan), this could be an indication thatthe constantly expanding size of the BRIC economies can act as at least apartial absorber of volatility shocks from individual AEs The findingsshow the importance of the aggregate trade-weighted returns of the AEs onthe BRIC markets
the importance that highlights the nature of BRICeconomies as major players in global trade and investment flows

con-Sarwar (2012) found that the VIX index was an investor fear gage forthe economies of the United States, Brazil, China and India For the pur-pose of this study, however, we used VIX as an overall indicator ofexpected future global volatility Brazil, Russia and China all show thatVIX is a statistically significant at the 1% to 5% level India is significant

at 10% level As would be expected, the correlation coefficients for each ofthese markets are negative meaning that the returns of these emergingeconomies are negatively correlated with the lagged VIX index

Some of the initial indicators as to the reasons for weaker linkagesbetween VIX and Indian market volatility point to the strength of India’sgrowth in the past number of years relative to global growth environment

In 2009
2010, according toSaha (2012), India’s positive performance wasdown to three main factors First, it had a robust financial sector, whichwas both well capitalized and well regulated These were not characteristics

of the developed world economies Secondly, the capital account wasopened cautiously and gradually Finally, they had large stock of foreignreserves Government and consumer spending drove the positive resultsand this transferred into increase output in the manufacturing sector Thestimulus package by the Indian government has caused growth, however it

has also expanded fiscal deficit to 6.8% of GDP as of 2012 Overall, itwould appear that India’s boom period post GFC has resulted in Indianmarket becoming somewhat differentiated from other BRIC markets.

CONCLUSIONSThe aim of our analysis was to examine the volatility spillover and returnspillover from the developed market to each of the BRIC nations Theoverall goal was to be able to provide further findings into the relationshipbetween these global equity markets The motivation for this research isthat increasing global interconnections between the economies, as well asrising degree of internationalization and globalization of investment mar-kets put into question the traditional view of the EMs as diversificationtools for investors Increasingly, modern markets are showing signs ofamplification in risks and sentiment spillovers and the Global FinancialCrisis, as well as subsequent crises in the AEs, can be characterized as theperiod when such spillovers came to the forefront of markets and policyanalysts and investors

Contrary to the prevalent view that treats EMs as risk diversificationmarkets for investment portfolios, we find that the main channel for spil-lovers for each of the BRIC market returns was the AE-weighted averagereturn The second channel for spillovers is the VIX which was significant

at the 1
5% level for Brazil, Russia and China The VIX index was tively correlated to each of the aforementioned markets returns meaning inperiods of high volatility, as measured by VIX, the returns of the indiceswould decrease This leads to the conclusion that the VIX acted as aninvestor fear gage both for AEs and BRIC markets in times of highvolatility

nega-As could be seen in the data analysis section, each of the EMs hadhigher volatility compared with the developed market for the period stu-died The reason for this is that investors see the EM as higher risk andthus the sentiment for the overall global market risk perceptions (VIX) has

a major impact on the returns of EM indices such as Brazil, Russia andChina and to a lesser extent for less-integrated market, such as India.Finally, our results show that, with the exception of Europe
Brazil pair,individual AEs’ market volatility is not an important channel for volatilityspillovers to BRIC markets As has been mentioned earlier the high level ofintegration between Europe and Brazil driven by trade and banking

channels has caused a volatility spillover for the period of 2000
2014.However, there is no evidence of volatility spillover from Japan or theUnited States into Brazil and along with this there is no evidence of a vola-tility spillover from Japan, the United States or Europe into Russia, India

or China This would indicate that while the BRIC nations are affected byglobal market sentiment, there may not be enough market integration tocreate a volatility contagion channel via individual AEs’ markets

In summary, we find that in recent years, the traditional strong hedgingrelationship between BRIC markets and AEs markets has been altered.While BRIC economies remain relatively well insulated from volatilityshocks spillovers from individual AEs’ markets, they are no longer insu-lated from the volatility spillovers from the overall AEs’ markets and fromthe investor risk sentiment underlying AEs markets (VIX)

Bhar, R., & Nikolova, B (2007) Analysis of mean and volatility spillover using BRIC tries, regional and world index returns Journal of Economic Integration, June, 369
381 Dimitrioua, D., Kenourgiosb, D., & Simosa, T (2013) Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH
DCC approach International Review of Financial Analysis, 30, 46
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European Commission (2014, May 27) Countries and regions
Brazil Retrieved from http:// ec.europa.eu/trade/policy/countries-and-regions/countries/brazil/ Accessed on July 27, 2014.

Foley-Fisher, N., & Guimaraes, B (2013) US real interest rates and default risk in emerging economies Journal of Money, Credit and Banking, 45(5), 967
975.

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reac-Gagnon, L., & Karolyi, G A (2006) Price and volatility transmission across borders Financial Markets, Institutions & Instruments, 15(3), 107
158.

Joshi, P (2011) Return and volatility spillovers among Asian stock markets Sage Open, 2011,

Mensi, W., Hammoudeh, S., Reboredo, J C., & Nguyen, D K (2014) Do global factors impact BRICS stock markets? A quantile regression approach Emerging Markets Review, 19, 1
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Ng, A (2000) Volatility spillover effects from Japan and the U.S to the Pacific
Basin Journal of International Money and Finance, 19(2), 207
233.

Patterson, G (2013, July 23) Russian-EU energy interdependence and security in Europe Working Paper, Washington University Retrieved from https://digital.lib.washington edu/researchworks/handle/1773/22842

Saha, M (2012) Indian economy and growth of financial market in the contemporary phase

of globalization era International Journal of Developing Societies, 1(1), 1
10.

Sarwar, G (2012) Is VIX an investor fear gauge in BRIC equity markets? Journal of Multinational Financial Management, February, 1
50.

Slater, S (2014, February) European banks have $3 trillion of exposure to emerging markets Reuters: Retrieved from http://www.reuters.com/article/2014/02/04/us-europe-banks- emergingmarkets-idUSBREA130H320140204 Accessed on July 31, 2014.

Uribe, M., & Yue, V (2006) Country spreads and emerging countries: Who drives whom Journal of International Economics, 69, 6
36.

Zhu, L., & Yang, X (2013) The study of American quantitative easing monetary policy’s lover effects on China’s inflation International conference on education technology and management science (2013), pp 400
403.

spil-ROLE OF LEVERAGE IN THE IRISH ECONOMIC COLLAPSE

Shaen Corbet

ABSTRACTPurpose
This chapter examines the roles and challenges for the Irisheconomy in the aftermath of the collapse of the Celtic Tiger and theonset of the 2008 economic crisis Specifically, it does review the rolethat Government, the Central Bank of Ireland, and the FinancialRegulator had before, during and after the collapse of both the Irishbanking system and property market This chapter explains the driversbehind the growth of the Celtic Tiger and the sources of leverage thatamplified the severity of the subsequent collapse Specifically, this chap-ter focuses on the changes that have since been made and provides areview of the lessons that can be obtained from the collapse

Methodology/approach
The results presented in this chapter arebased on analysis of secondary sources and a literature review to deter-mine conceptual and theoretical frameworks for identifying the specificissues that the Irish economy endured since the 2008 economic crisis andthe red flags and signals that were either missed or ignored

Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery

Advances in Sustainability and Environmental Justice, Volume 18, 21
55

Copyright r 2016 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 2051-5030/doi: 10.1108/S2051-503020160000018002

21

Findings
Combined with the subprime collapse of 2007 and the national sovereign debt crisis evident since 2008, Ireland and the actions

inter-of its regulators and policy makers undoubtedly generated not only acatalyst to financial ruin, but also an incubator to aid its severity Theprecise drivers that created the Celtic Tiger remained unchanged andplayed a significant role in the subsequent collapse Banks were lever-aged towards the Irish property market and the role of leverage infinancial markets created mispricing, to which the basic principles ofthe efficient market hypothesis (EMH) failed This miscalculation ofrisk was severe and destructive for the real economy The reward forthis error was a place in history as an ‘I’ in the derogatory term

‘PIIGS’

Practical implications
This chapter could be used as teaching materialfor undergraduate and masters programmes in economics and finance Itprovides a response to further understand the behaviour of the Irish econ-omy during the development of the Celtic Tiger and the subsequent finan-cial collapse that enveloped the Irish state

Originality/value
This chapter discusses the role of leverage out a financial system and the necessity for financial monitors to promote

through-an environment of sustainability through-and finthrough-ancial endurthrough-ance; that which cthrough-ansurvive an international financial crisis event

Keywords: Financial crisis; banking crisis; housing markets; bubbles;contracts for difference; leverage

INTRODUCTIONModeration is defined as: ‘being within reasonable limits; not excessive orextreme’ The Irish experience of the recent international financial crisiscould be considered as quite the opposite Greed was deemed as the key tosuccess, across all facilities and functions of the Irish state This greedcentred upon financial growth, whether it be through stock market invest-ment, maximizing cheap and readily available banking credit or propertyinvestment In Ireland, excess became the norm; one house was simply notenough, the banking system created an environment with greater than

100 per cent LTV1(loan to value) lending that enabled borrowers to obtain

funding in excess of five to seven times their annual salary and the appetitefor this finance was constant; the supply of property dually obliged Whatcould go wrong? If property prices continued their upward trend, every-body was a winner
investors were profitable, banks were repaid withinterest, government obtained duties and taxes, it was a financial utopia.

2008 proved otherwise The Irish property market had been in an extensivebubble

Enter 2015 Property prices have rebounded substantially Credit hasstarted to become more readily available with historically low rates ofinterest in Europe and the rental market in Irish cities bares the hall-marks of major cities such as London and New York in terms of annualprice growth Supply of affordable housing has frozen as developersstockpile property and sites in an attempt to recoup their pre-bubblespending and expectations A Public Accounts Committee2interviews themain agents involved in the Irish economic collapse Each interviewseems to be a repeat of that which has just gone before: an apology forwhat transpired, an explanation of what was deemed to be practice in thebest interest of the Irish state, then, a sudden case of selective amnesiabased on the exact facts of meetings and events around the time of theeconomic collapse Irish citizens have become immune to this recurringtheme After all, their voices of anger led to the set-up of this committee,but it has instead created a platform for politicians to obtain publicity.The Irish legal system remains at large, continuing to act as an enabler

to white collar crime In fact, almost seven years after the collapse ofAnglo Irish Bank, we are still awaiting the trial of its CEO for allegedmalpractice We continue to wait

What lessons can be learned? If we are to believe the rhetoric, this0.001% probability international economic shock created Ireland’s recenteconomic climate This chapter explains that Ireland in fact was the agent

of its own demise Despite the rapidly growing Euro-scepticism now clearlyevident in countries such as Greece and the United Kingdom; Irelandstands as the success story of a member that needed assistance throughTroika bailout funding, without which Ireland may today have been amuch bleaker place But, leverage was the core problem, in fact, in certainIrish markets leverage was used upon leverage This added significant speed

to the financial collapse The immediacy and demands of the populationand government alike did not instigate the financial crisis alone It simplygenerated an environment in which crisis could thrive and created a passagefrom which it could spread from the housing market, to the banking sys-tem, and then to the real economy

GROWTH STIMULANTS OF THE CELTIC TIGER ERABetween 1995 and 2000, Ireland entered a period of unprecedented growth,

so much so that the country became a blueprint of economic success There

is a substantial amount of literature focusing on the development of theCeltic Tiger Simultaneously, there is research that pose significant ques-tions about the true origins of its growth O´’Gra´da (2002) asked whetherthe Celtic Tiger was a ‘paper-tiger’ In this regard, the rapid economicgrowth in Ireland was simply a delayed convergence of the Irish economyafter decades lagging Western Europe Kirby (2004a) found that whileinvestigating Irish economic growth, the Celtic Tiger economy appears to

be a model of successful development, but a model of capital accumulation.The author found that it was a mirage and warns specifically about thesocial costs of economic success in the era of neoliberal globalization

Kitchin, O’Callaghan, Boyle, Gleeson, and Keaveney (2012)focused on therole of this neoliberal policy when guiding economic growth and points outthat when the Irish government followed fiscal and planning policy forma-tion, implementation and regulations were overly shaped by this policy,particularly from 1997 onwards The government promoted a free market,minimizing regulation, privatizing public goods and keeping direct taxeslow and indirect taxes high, while loosening regulations of the financialsector Kirby (2004b) found that the Celtic Tiger boom had camouflagedrather than resolved Ireland’s development problems and that it stands as acautioning tale of the social costs of economic success under the conditions

of real existing globalization

Other research points at the specific drivers of the Celtic Tiger boomthat stemmed from the 1990s Hardiman (2005) investigated the politicalinfluence of the Irish government during the 1990s The author promotestwo explanations for economic growth The first stresses the primacy of themarket, while the other focuses on political choice Politics obtains muchattention, particularly the successful strategic adaption of the challengesand opportunities afforded by the completion of the Single EuropeanMarket during the 1990s It is also noted byO´’Gra´da and O’Rourke (1996)

andHonohan (2002)that Ireland had in the mid-1990s, just exited a period

of economic stagnation, high levels of emigration and crippling publicdebt, set against the backdrop of high levels of public taxation

The Irish economy expanded at an average rate of 9.4% between 1995and 2000 and continued to grow at an average rate of 5.9% until 2008.This Celtic Tiger economy offered record employment levels, particularly

in construction, leading to net-immigration This was further aided by thereduction of borders through European Union membership There were ofcourse some specific drivers that helped to fuel the Celtic Tiger The Irishcorporate tax rate attracted numerous multinationals to establish withinthe country Successive Irish governments had maintained a low corporatetax level as a key attractive feature of operating in the Irish economy In

2014 and 2015 it has caused much debate on a European level at a rate of12.5 per cent Altshuler, Grubert, and Scott Newlon (1998) found thatthere was an increasing sensitivity of US foreign direct investment (FDI) totax rates, particularly that the elasticity of real capital to after-tax rates ofreturns doubled from 1.5 in 1984 to almost 3 in 1992 The authors attributethe rise specifically to the mobility of capital and increased globalization.Numerous European countries continue to claim that they cannot competewith a rate that is as low as that found in Ireland It has also raised someparticular political issues in relation to private deals completed by govern-ment with individual companies in the past, offering further incentivesalong with a low corporate tax rate to operate from Ireland This accusa-tion led to the President of the United States, Barack Obama to indicatethat he would close the door on companies who continued to use ‘inver-sions’ as a means of paying tax in other jurisdictions The US Treasury esti-mated that the plan could generate as much as $17 billion to the USexchequer if loopholes such as the ‘double Irish’ tax mechanisms wereclosed.3

During the growth of the Celtic Tiger, Ireland possessed a highly cated and English-speaking workforce, where wages were relatively low on

edu-an international level Wickham and Boucher (2004) compare the tion systems of a group of ‘Tiger’ economies to show that one significanttrait was present, namely, the concentration on the low-cost production oftechnical graduates, often in short-cycle and sub-degree level courses.4Whereas, Luisa Ferreira and Vanhoudt (2004) argued that higher educa-tion, especially in the vocational and technical streams of educational pro-vision, and the sectoral composite of FDI in favour of high-tech industrieswere self-reinforcing factors and have been decisive in Ireland’s extraordin-ary boom Hanushek and Woessman (2007) found that there was a highlevel of importance attributed to both minimal and high-level skills, thecomplementarity skills, the quality of economic institutions and the robust-ness of the relationship between skills and growth.Barrell and Pain (2012)

educa-found that the acquisition of firm-specific knowledge-based assets is educa-found

to be an important factor behind the growth of FDI, suggesting that such

investments are likely to be an important channel for the diffusion of ideasand technologies.

The European Union has been one of the key drivers associated with thegrowth of the Celtic Tiger Since Ireland joined the EU in 1973, it hasreceived over h17 billion (not including bailouts) in EU Structural andCohesion Funding.5This funding derived from the European Social Fund(ESF) and the European Regional Development Fund (ERDF) and wasused to build physical infrastructure and develop the education sector ofthe state Cappelen, Castellacci, Fagerberg, and Verspagen (2003) foundthat EU regional support has a significant and positive impact on thegrowth performance of European regions There were also signs of achange in the impact of this support in the 1990s, indicating that a majorreform of the structural funds undertaken in 1988 may have succeeded inmaking EU regional policy more effective Ireland’s membership in the EUhelped the country to gain access to Europe’s largest markets as beforeentry to the EU, the majority of trade had been with the United Kingdom

In this new trading bloc, Ireland could now sell its produce to the highestbidder with the introduction of the euro removing exchange trade risk,reducing tariffs and generating a much easier and reliable tradingenvironment

The role of IDA Ireland (Industrial Development Authority) was alsovery important The IDA is the agency responsible for industrial develop-ment in Ireland and was founded in 1949 During the 1990s, the provision

of subsidies and investment capital by the IDA encouraged high-profilecompanies to locate to Ireland Specifically, these companies cited EUmembership, relatively low wages, government grants and low tax rates asthe key to their decision The main focal point of these industries was inthe Information Technology (IT) and pharmaceutical industries These spe-cific industries created a catalyst for growth due to their high revenue andhighly skilled output, generating tax revenue and dramatically increasingthe GDP of the country.Calliano and Carpano (2000)found that Ireland’sNational Systems of Technological Innovation (NSTI) resulted in a signifi-cant inflow of FDI inwards and was the outcome of proactive economicstrategies implemented by the Irish government, mainly in the areas ofresearch and development infrastructures, labour, skills, educational sys-tems and telecommunication infrastructure Ireland embarked on a course

of rapid infrastructural development during this time, with the building

of numerous motorways and transport networks, but in particular theInternational Financial Services Centre (IFSC) in Dublin In July 2003,the government established the Science Foundation Ireland6 to promote

education for highly skilled careers, particularly in biotechnology andinformation and communications technology This foundation alsoinvested in science initiatives with the specific aim of furthering Ireland’sknowledge economy.

Alesina and Perotti (1996) found that income inequality, by fuellingsocial discontent, increases sociopolitical instability The latter, by creat-ing politico-economic environments, reduces investment As a conse-quence, income inequality and investment are inversely related Alesina,O¨zler, Roubini, and Swagel (1996) found that in countries and time peri-ods with a high propensity of government collapse and political instabil-ity, economic growth is significantly lower than otherwise It is within thisspectrum that Ireland gained a much needed economic boost from theGood Friday Agreement on April 10 1998, which was a major politicaldevelopment in Northern Ireland The Agreement was approved by voterswithin the island of Ireland on May 22 1998, covering issues relating tocivil and cultural rights, the decommissioning of weapons, justice andpolicing In the immediate aftermath, it generated a period of stabilitythat was necessary for both Ireland and Northern Ireland to prospereconomically

Another key driver of the Celtic Tiger was regulation, or lack thereof.Companies were attracted to working in Ireland due to the ease of doingbusiness within the country, a fact that has come to light specifically in thepost mortem of the Celtic Tiger Numerous deficiencies have been identifiedduring this era and lax regulation gave private finance the power to makemost of the investment decisions for the country as a whole The IrishFinancial Regulator during this time has been identified as weak and even

as not fit for purpose.7But it is hard to segregate whether the lack of lation was purposeful given the international business that it had attracted

regu-Levine (2002) could not link financial development with either a based or a market-based financial system

bank-Another driver used to stimulate the Irish economy was that of theSpecial Savings Incentive Account (SSIA) which was available to openbetween May 2001 and April 2002 and was introduced in the Financial Act

2001.8 The SSIA was a type of interest-bearing account that features astate-provided top-up of 25 per cent of the sum deposited.9The fundingamounted toh14 billion and was expected to increase the purchasing power

of those who partook through increased consumer spending, with an mated contribution of nearly 2 per cent.Lane (2010)found that the estab-lishment of the SSIA was in part, motivated by a desire to cool down theeconomy, but points out that this scheme was not targeted at cyclical