to turn down. to elaborate, the marked deterioration in the irish fiscal position in recent years reflects in part the effects of strong growth in public spending first during the boom years, and then resulting from the demands imposed by the jump in unemployment. but a much more significant driver has been sharp collapse in tax revenues. the scale of the latter has been remarkable. the tax take, having averaged over 24 per cent of gdp in the first seven years of the new millennium, collapsed to barely 20 per cent of a greatly reduced gdp by 2009. this reflected a fundamental weakness in the tax structure and, in particular, an excessive reliance on revenues related to the value of property transactions. looked at more broadly, this was the continuation of a trend that has been evident over the past two decades, which has seen a systematic shift away from more stable and reliable revenue sources such income tax, vat and excise taxes, towards more cyclically sensitive taxes. the result was more and more dependence on corporation tax, stamp duties and capital gains tax as sources of revenue ; the contribution of this group of taxes grew from about 7 per cent of total tax revenue in 1987 to over 35 per cent two decades later. the buoyancy of these taxes during the boom period facilitated both a reduction in the income tax burden and the numbers in the tax net. it also financed a strong and persistent rise in public spending. while reliance on “ boom time ” taxes made these developments possible for a time, it left the fiscal position particularly exposed to a downturn. it also meant that fiscal policy was effectively operating in a pro - cyclical manner during this period and was itself stoking the boom. ( indeed, it has recently been estimated that the contribution of the residential property market to total tax revenue through vat, stamp duty and capital gains alone more than doubled to over 12 per cent in the seven years to 2006, addison - smyth and mcquinn, 2009 ). there is also the issue of the extent to which the nature and design of the tax system itself partly fuelled the construction boom. tax incentives for developers and homeowners have long been a feature of the irish taxation system and must have contributed significantly to the oversupply of houses which now exists, especially in parts of the country where underlying demand is likely to remain weak for many years to come. the impact of the subsequent collapse in what were in reality largely windfall revenues can be gauged from the fact that, since 2007, total tax revenues

##omc meeting. 3 there are also other examples of the fomc adjusting its balance sheet based on its ongoing assessment of the economy. the advantage of the current policy is that it relates asset purchases to economic conditions and the efficacy and costs of the policy in a more explicit and transparent manner. this should enable market participants to recalibrate their expectations more continuously in light of incoming information and may provide some additional reassurance against downside risks. despite the changes in communication around the current purchases, their intended purpose and the way that i anticipate the purchases will impact the economy are similar to previous policies. the purchases are conducted to help achieve the fomc ’ s dual mandate of maximum employment and price stability. asset purchases promote this mandate by putting downward pressure on longer - term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. the current purchases reduce interest rates and ease financial conditions through the same transmission channels as previous purchase programs. as has been widely discussed in the academic literature, one of the most important channels is the portfolio balance effect. 4 this theory relies on the premise that financial assets are imperfect substitutes in investors ’ portfolios, and, as a result, a rise in the demand for a particular financial asset relative to its supply – reflecting the federal reserve ’ s asset purchases, for example – will increase its price and reduce its yield. after selling that asset to the federal reserve, investors may rebalance their portfolios by investing in other assets, raising the prices of those assets, lowering their yields, and easing overall financial conditions. the federal reserve ’ s asset purchases are designed to remove risk from the portfolios of private investors. for example, treasury and agency mbs purchases remove duration risk, thereby lowering longer - term interest rates and reducing private - sector borrowing costs. furthermore, agency mbs purchases also remove prepayment risk from the market, since homeowners have the option to prepay their mortgages at any time. investors generally demand an extra return to bear this risk, which is incorporated into agency mbs yields and passed along to borrowers in the form of higher primary mortgage rates. all else equal, the removal of a considerable amount of this risk by the fed ’ s purchases would be expected to lower agency mbs rates by lowering this extra return, thereby reducing primary mortgage rates, stimulating demand for housing, and prompting increased refinancing activity. indeed, see responses to june 2012 survey of primary