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The Portuguese Disinflation Process: Analysis of Some Costs and Benefits

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  • António Portugal Duarte

    (Faculty of Economicas & GEMF, University of Coimbra)

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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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0504005.

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Length: 20 pages
Date of creation: 13 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0504005

Note: Type of Document - pdf; pages: 20
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Web page: http://128.118.178.162

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Keywords: Monetary Policy; European Union; Disinflation; Co-Integration; Near-VAR and Simulation;

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References

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  1. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
  2. 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.
  3. Laurence Ball, 1991. "The Genesis of Inflation and the Costs of Disinflation," NBER Working Papers 3621, National Bureau of Economic Research, Inc.
  4. Guy Debelle, 1999. "Inflation Targeting and Output Stabilisation," RBA Research Discussion Papers rdp1999-08, Reserve Bank of Australia.
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  8. Karl-Heinz Todter & Gerhard Ziebarth, 1997. "Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits," NBER Working Papers 6170, National Bureau of Economic Research, Inc.
  9. Vítor Gaspar & Ildeberta Abreu, 1999. "Price Stability and Intermediate Targets for Monetary Policy," Working Papers w199901, Banco de Portugal, Economics and Research Department.
  10. Katarina Juselius & David F. Hendry, 2000. "Explaining Cointegration Analysis: Part II," Discussion Papers 00-20, University of Copenhagen. Department of Economics.
  11. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
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  13. Christopher J. Neely & Christopher J. Waller, 1997. "A Benefit-Cost Analysis Of Disinflation," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 50-64, 01.
  14. Laurence H. Meyer, 2001. "Inflation targets and inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 1-14.
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Cited by:
  1. 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.
  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. Pedro Bação & António Portugal Duarte, 2010. "Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal," GEMF Working Papers 2011-04, GEMF - Faculdade de Economia, Universidade de Coimbra.

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