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Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?

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  • Laurent Maurin

    (European Investment Bank)

Abstract

In order to illustrate how tightened financial conditions have hampered investment in Portugal, we estimate a Factor Augmented Vector AutoRegressive model (FAVAR) with Bayesian techniques. We extract a financial conditions indicator and identify credit supply, demand and fiscal consolidation shocks with sign restrictions. We show that changes in financial conditions, which result from both credit supply shocks and fiscal shocks, have a protracted impact, especially on bank loans and bank lending spreads. We then develop a scenario in which we the tightening in financial conditions in the wake of the sovereign crisis is attributed to credit supply shocks. The analysis suggests that, due to the crisis, by the end of 2017, Portuguese GDP, corporate investment and corporate loans were reduced by respectively 6, 22 and 20 p.p., public investment by 1 p.p. of GDP and bank lending spreads widened by 80 b.p.

Suggested Citation

  • Laurent Maurin, 2019. "Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 18(1), pages 19-45, February.
    • Handle: RePEc:spr:portec:v:18:y:2019:i:1:d:10.1007_s10258-018-00151-y
    DOI: 10.1007/s10258-018-00151-y
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    Cited by:

    1. Andersson, Malin & Maurin, Laurent & Rusinova, Desislava, 2021. "Market finance as a spare tyre? Corporate investment and access to bank credit in Europe," Working Paper Series 2606, European Central Bank.
    2. Maurin, Laurent & Andersson, Malin & Rusinova, Desislava, 2021. "Market finance as a spare tyre? Corporate investment and access to bank credit in Europe," EIB Working Papers 2021/09, European Investment Bank (EIB).

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    More about this item

    Keywords

    Corporate investment; Public investment; Financial indicators; Activity; Cost of financing; Bank loans; FAVAR model; Bayesian estimation; Sign restrictions; Scenario analysis; Sovereign stress; Demand shock; Credit shock; Fiscal consolidation;
    All these keywords.

    JEL classification:

    • 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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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