IDEAS home Printed from
   My bibliography  Save this paper

Moving the Escudo into the Euro


  • Braga de Macedo, Jorge
  • Catela Nunes, Luís
  • Covas, Francisco


When the 1987 general elections brought a durable government to Portugal, the national environment was still inflationary. Nevertheless, thanks to the efforts of successive ministers of finance/central bank governor pairs, the criteria for Economic and Monetary Union (EMU) were met and the seventh pair saw the euro conversion rate be set at 200 escudos. The agreed rate represents a depreciation of some 16% over the one at which the escudo entered the ECU basket in 1989. As the change in regime towards stability-oriented macroeconomic policies was completed when the parity grid of the Exchange Rate Mechanism of the European Monetary System (ERM) was under severe stress, escudo depreciations were agreed upon at realignments initiated by the peseta. The understanding by the Portuguese authorities of the ERM code of conduct as they prepared to join after the 1991 general elections made it possible to acquire financial reputation very quickly. But the enhanced national credibility abroad caused tension within several minister/governor pairs, especially with respect to the timing of ERM entry, the speed at which to move to full currency convertibility and whether the escudo should respond to peseta realignments. Moreover, both the opposition and the governing party initially resisted the stability-oriented policy, stalling structural reforms and allowing the opposition to win the 1995 general elections on a reformist platform. As a consequence, the stability-oriented policy was maintained until EMU qualification but there were no other major reforms, rasing the threat of a "euro hold-up". The weekly escudo-DMark rate reveals widely different volatility states which were accompanied by six successive exchange rate regimes. Before entering the ERM, a crawling peg was discreetly replaced by DMark shadowing with reinforced controls on capital inflows at the beginning of first stage of EMU. Yet, the escudo-DMark rate, even allowing for the last realignment, was more stable in the ERM than when it was inconvertible and the central bank controlled the currency. The comparison excludes the subperiod of crises before widening the bands and the one after volatility in prospective EMU qualifying currencies subsided. Markov switching autoregressive conditional heteroskedasticity (SWARCH) models with more than three states capture all regimes. The specification with five states is favored because it suggests the nature of the response of the central bank to speculative attacks during the crises regime.

Suggested Citation

  • Braga de Macedo, Jorge & Catela Nunes, Luís & Covas, Francisco, 1999. "Moving the Escudo into the Euro," CEPR Discussion Papers 2248, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2248

    Download full text from publisher

    File URL:
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    1. Bliss,Christopher & De Macedo,Jorge Braga (ed.), 1990. "Unity with Diversity in the European Economy," Cambridge Books, Cambridge University Press, number 9780521395205, October.
    2. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    Full references (including those not matched with items on IDEAS)

    More about this item


    EMU; Portugal; Regime Switching;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2248. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.