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The Portuguese Disinflation Process: Analysis of Some Costs and Benefits

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  • António Duarte

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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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File URL: http://hdl.handle.net/10.1007/s11300-009-0054-5
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Bibliographic Info

Article provided by Springer in its journal Transition Studies Review.

Volume (Year): 16 (2009)
Issue (Month): 1 (May)
Pages: 157-173

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Handle: RePEc:spr:trstrv:v:16:y:2009:i:1:p:157-173

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Related research

Keywords: European Union; Disinflation; Co-integration; Near-VAR and simulation; C32; E58; F31; F33;

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References

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  1. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
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  8. Vítor Gaspar & Ildeberta Abreu, 1999. "Price Stability and Intermediate Targets for Monetary Policy," Working Papers w199901, Banco de Portugal, Economics and Research Department.
  9. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  10. Laurence H. Meyer, 2001. "Inflation targets and inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 1-14.
  11. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
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  13. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
  14. Buiter, Willem H & Grafe, Clemens, 2001. "No Pain, No Gain? The Simple Analytics of Efficient Disinflation in Open Economies," CEPR Discussion Papers 3038, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Pedro Bação & António Portugal Duarte, 2011. "Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal," Book Chapters, Institute of Economic Sciences.
  2. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2012. "Testing for Nonlinear Adjustment in the Portuguese Target Zone: Is there a Honeymoon Effect?," GEMF Working Papers 2013-03, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. 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 - Faculdade de Economia, Universidade de Coimbra.

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