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A macroeconomic structural model for the Portuguese economy

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  • Mourinho Félix, Ricardo

Abstract

This paper presents a macroeconomic model with some microfoundations for a small open economy. The main purpose is the simulation of external environment and fiscal policy shocks. The model includes sufficiently disaggregated public sector and household disposable income accounts and it considers a fiscal policy rule that ensures the fulfilment of some budgetary requirements. Thus, the impact in main macroeconomic aggregates of alternative external environment shocks can be evaluated under the assumption that the government automatically adjusts the income tax rate to fulfill these requirements. Furthermore, it is well known that the impact of fiscal policy shocks depends crucially on the economic agents’ ability to adjust their behaviour to fiscal policy changes, according to their assessment on future economic developments. Since, this model considers economic agents that form model-consistent expectations, then fiscal policy simulations can be performed properly. In this study, the model is calibrated for the Portuguese economy and the fiscal rule budgetary requirements (a target fiscal balance of 3% of GDP and a debt-to-GDP ratio target of 60%) correspond to the Stability and Growth Pact excessive deficit thresholds. The simulations presented here can contribute to the current discussion of budgetary consolidation measures in Portugal.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10465.

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Date of creation: 18 Oct 2005
Date of revision: 25 Nov 2005
Handle: RePEc:pra:mprapa:10465

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Keywords: structural models; rational expectations; fiscal policy; fiscal rule; Portugal;

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  1. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  2. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1995. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  3. Sefton, J A & In't Veld, J W, 1999. "Consumption and Wealth: An International Comparison," Manchester School, University of Manchester, vol. 67(4), pages 525-44, September.
  4. Pedro Duarte Neves & Susana Botas & Carlos Robalo Marques, 1998. "Estimation of potencial output for the Portuguese economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
  6. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1291-1318, August.
  7. Kortelainen, Mika, 2002. "EDGE: a model of the euro area with applications to monetary policy," Scientific Monographs E:23/2002, Bank of Finland.
  8. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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