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The Portuguese Disinflation Process: Analysis of Some Costs and Benefits

  • António Portugal Duarte

    (Faculty of Economicas & GEMF, University of Coimbra)

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://econwpa.repec.org/eps/if/papers/0504/0504005.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. Guy Debelle, 1999. "Inflation Targeting and Output Stabilisation," RBA Research Discussion Papers rdp1999-08, Reserve Bank of Australia.
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  11. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
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  13. 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.
  14. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
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  16. 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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