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The Portuguese Disinflation Process: Analysis of Some Costs and Benefits

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  • António Duarte

Abstract

This study aims to analyse the Portuguese economic policy of disinflation through a nominal stabilization policy of the Portuguese escudo. We study the pegging of the Portuguese escudo (PTE) to the Deutsch mark (DM) knowing the reputation of the Bundesbank for its anti- inflationary record and the role played by the Deutsch mark in the stability processes of foreign exchange and European price levels. The study was based on the attainment of co-integrating relations using Johansen’s methodology, the construction of a Near-VAR model and the establishment of a simulation analysis. The acceptance of German monetary policy and the pegging of the escudo to the Deutsch mark allowed the Portuguese economy to achieve its primary goal of price stability. However, despite the credibility and stability gains obtained, the adoption of a disinflation policy led to a real appreciation of the escudo. This study tries to clarify the influence that an appreciation of the real exchange rate can have on GDP and price levels. It cannot be denied that Portugal has made great progress in its European integration, successfully integrating into the group of EMU member-states. However we can point to a decrease in Portuguese competitiveness as the price paid for the disinflation process. This reflects itself in lower wages, which in turn limit output growth. We find that it is of primary importance to realise both the benefits of disinflation, and the costs of the policies in terms of output.
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  • António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 16(1), pages 157-173, May.
    • Handle: RePEc:spr:trstrv:v:16:y:2009:i:1:p:157-173
    DOI: 10.1007/s11300-009-0054-5
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    1. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2012. "Is There a Trade-off between Exchange Rate and Interest Rate Volatility? Evidence from an M-GARCH Model," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2012(1), pages 19-37.
    2. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2009. "Exchange Rate Mean Reversion within a Target Zone: Evidence from a Country on the Periphery of the ERM," GEMF Working Papers 2009-15, GEMF, Faculty of Economics, University of Coimbra.
    3. Pedro Bação & Sara Cerdeira & António Portugal Duarte, 2019. "Portugal in the Eurozone: Evolution and Expectations," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 66(si), pages 173-189, December.
    4. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2012. "Is There a Trade-off between Exchange Rate and Interest Rate Volatility? Evidence from an M-GARCH Model," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2012(1), pages 19-37.
    5. Joao Sousa Andrade & António Portugal Duarte & Adelaide Duarte, 2013. "Testing for Nonlinear Adjustment in the Portuguese Target Zone: Is there a Honeymoon Effect?," EcoMod2013 5305, EcoMod.
    6. Pedro Bação & António Portugal Duarte, 2011. "Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal," Book Chapters, in: Mirjana Radovic Markovic & Srdjan Redzepagic & João Sousa Andrade & Paulino Teixeira (ed.), Serbia and the European Union: Economic Lessons from the New Member States, edition 1, volume 1, chapter 4, pages 61-76, Institute of Economic Sciences.

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    More about this item

    Keywords

    European Union; Disinflation; Co-integration; Near-VAR and simulation; C32; E58; F31; F33;
    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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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