The Portuguese Public Finances and the Spanish Horse
This study is based on the idea that inadequate use of fiscal policy through restrictive policies shifts the short-run demand curve that in turn induces shifts in the long-run supply curve leading to a dynamic reduction of growth. The analogy with the old metaphor of the Spanish horse seems obvious. We apply this idea to Portugal to 2002-2009, we will prove that in order not to be caught in the horse’s trap we have to keep the concept of potential output in the evaluation of the structural budget balance instead of replacing it by a trend indicator, which, can lead to a sustainable reduction of the “food” and consequently to a disaster. The goal of full employment is no longer present in the idea of zero public balances. In the medium-term, the cycles will offset each other when calculated in relation to a trend and thus the same applies to budget balances as defined in the Stability and Growth Pact (SGP). If actual output moves away persistently from full employment output, trend output will also move away from full employment. As a consequence, expenditures will tend to increase and incomes to decrease. This situation creates deficits that should be corrected by the SGP. This correction will lead to a reduction in demand and thus in actual output and therefore, necessarily, in trend output itself. We present an empirical solution to this problem based on the concept of trend output in order to correct its inflection after 2002. This analysis has two drawbacks, the influence of deficits in the prices of non-tradable goods and the fact that we may not have food to give to our horse. This is the case if public debt is too high. Nevertheless, this study shows that the criteria and methods that are used by the SGP in the definition of fiscal policy are incorrect.
|Date of creation:||Dec 2011|
|Date of revision:|
|Publication status:||Published in Économie Appliquée LXVI(4): 5-26, 2013.|
|Contact details of provider:|| Postal: Av. Dias da Silva, 165, 3004-512 COIMBRA|
Phone: + 351 239 790 500
Fax: +351 239 403511
Web page: http://www.uc.pt/en/feuc/gemf/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hyndman, Rob J. & Khandakar, Yeasmin, 2008.
"Automatic Time Series Forecasting: The forecast Package for R,"
Journal of Statistical Software,
Foundation for Open Access Statistics, vol. 27(i03).
- Rob J. Hyndman & Yeasmin Khandakar, 2007. "Automatic time series forecasting: the forecast package for R," Monash Econometrics and Business Statistics Working Papers 6/07, Monash University, Department of Econometrics and Business Statistics.
- Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1, September.
- Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, September.
- Barry Eichengreen & Lucas D. Papademos, 2003. "The Future of the European Growth and Stability Pact," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(2), pages 68-77, October.
- Kim, C-J & Nelson, C-R, 1997.
"Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components,"
Discussion Papers in Economics at the University of Washington
97-06, Department of Economics at the University of Washington.
- Kim, Chang-Jin & Nelson, Charles R, 1999. "Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 317-34, August.
- Kim, C-J & Nelson, C-R, 1997. "Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components," Working Papers 97-06, University of Washington, Department of Economics.
- Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
- Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
- Marianne Baxter & Robert G. King, 1999.
"Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series,"
The Review of Economics and Statistics,
MIT Press, vol. 81(4), pages 575-593, November.
- Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
- Tom Doan, . "BKFILTER: RATS procedure to implement band pass filter using Baxter-King method," Statistical Software Components RTS00026, Boston College Department of Economics.
- Herwig Immervoll, 2003.
"The Impact of Inflation on Income Tax and Social Insurance Contributions in Europe,"
- Immervoll, Herwig, 2000. "The impact of inflation on income tax and social insurance contributions in Europe," EUROMOD Working Papers EM2/00, EUROMOD at the Institute for Social and Economic Research.
- Robert J. Hodrick & Edward Prescott, 1981.
"Post-War U.S. Business Cycles: An Empirical Investigation,"
451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
- Francesca D'Auria & CÃ©cile Denis & Karel Havik & Kieran Mc Morrow & Christophe Planas & Rafal Raciborski & Werner Roger & Alessandro Rossi, 2010. "The production function methodology for calculating potential growth rates and output gaps," European Economy - Economic Papers 2008 - 2015 420, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
- Feld Lars P. & Baskaran Thushyanthan, 2010. "Federalism, Budget Deficits and Public Debt: On the Reform of Germany's Fiscal Constitution," Review of Law & Economics, De Gruyter, vol. 6(3), pages 365-393, December.
- Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters, in: Business Cycles: The Problem and Its Setting, pages -23 National Bureau of Economic Research, Inc.
- John Y. Campbell & N. Gregory Mankiw, 1986.
"Are Output Fluctuations Transitory?,"
NBER Working Papers
1916, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1997.
"Capital Income Taxes and the Benefit of Price Stability,"
NBER Working Papers
6200, National Bureau of Economic Research, Inc.
- Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
- Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
- Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001.
"Cyclically Adjusted Budget Balances: an Alternative Approach,"
77, Quebec a Montreal - Recherche en gestion.
- Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 0077, European Central Bank.
- Timothy Cogley & James M. Nason, 1993.
"Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research,"
Working Papers in Applied Economic Theory
93-01, Federal Reserve Bank of San Francisco.
- Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
- Martin Feldstein, 1999. "Introduction to "Costs and Benefits of Price Stability, The"," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 1-8 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:gmf:wpaper:2011-21. 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: (Sara Santos)
If references are entirely missing, you can add them using this form.