PK:
Irish Confusion: [S]tandard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.
That was Keynes’s whole point in The Economic Consequences of Mr. Churchill — not that the return to gold at too high a parity would mean depression forever, but that it would subject Britain to years of unnecessary suffering.
Seeing some growth in Ireland, then, is not at all a refutation of Keynesian economics — it’s exactly what you’d expect, given that Ireland is in fact gradually achieving an “internal devaluation” via relative deflation. What would have posed an intellectual puzzle would have been a rapid bounceback to full employment. And that isn’t happening.
