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Inflation and Budget Deficit: What is the Relationship in Portugal?

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  • Agostinho S. Rosa

    (University of Évora, Portugal, and Center for Advanced Studies in Management and Economics of the University of Évora)

Abstract

The main causes of Portuguese inflation, based on annual data from 1954 to 1995, using the Johansen method, allows us to conclude that variation in Portuguese inflation is determined essentially by foreign inflation and by variation in the effective exchange rate of the Portuguese Escudo (PTE). In the long-term, the relationship between inflation rate and the growth rate of unit labour costs is almost unitary. However, the response of inflation change to the equilibrium error between inflation rate and changes in unit labour costs is slow and almost insignificant, while the response of unit labour costs to this disequilibrium is fast and significant, what suggests that the direction of causality is much more evident from the inflation rate on unit labour costs, than the reverse. The budget deficit as a percentage of GDP, are not significant in the short-term, in relation to variation in inflation as a dependent variable. However, it is significant in the relation to unit labour costs as a dependent variable, so we can have an indirect positive relation between inflation and lagged budget deficit.

Suggested Citation

  • Agostinho S. Rosa, 2011. "Inflation and Budget Deficit: What is the Relationship in Portugal?," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 12(2), pages 215-237.
    • Handle: RePEc:anp:econom:v:12:y:2011:i:2:215_237
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Budget Deficit; Unit Roots; and Cointegration;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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