A hybrid econometric structural model with trade and internationalisation adjustments (HESTIA)

Ireland’s economy is highly globalised and dominated by a small number of large multinational firms. This creates notable challenges in measuring and modelling economic activity, given the distortions caused to series such as Gross Domestic Product (GDP), trade and gross capital formation. This pa-per attempts to outline a hybrid small-scale structural econometric model with trade and internationalisation adjustments (HESTIA) which can be used to derive a baseline for short term quarterly forecasts and scenario analy-sis in the presence of these multinational distortions. The model uses ad-justed and modified series by isolating specific investment assets and ex-port products that are impacted by multinationals and allowing these to be treated separately. In particular, we present an adjusted output series that better measures the underlying growth rate. To achieve this, the traded sector of the economy is separated into blocks that capture the hetero-geneous dynamics of different export sectors while specific distorted as-set types are removed from investment series and the remainder modelled with behavioural drivers. The model is built to be updated with a quarterly frequency, relying on the information available following national account release dates.