A macroeconomic structural model for the Portuguese economy

Mourinho Félix, Ricardo (2005): A macroeconomic structural model for the Portuguese economy. Published in: Working Paper Series No. 13-05 (25 November 2005)

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: structural models; rational expectations; fiscal policy; fiscal rule; Portugal
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications

References

Backus, D. and Crucini, M. J. (2000), ‘Oil prices and terms of trade’, Journal of International Economics 50, 185–213

Blanchard, O. (1985), ‘Debts, deficits and finite horizons’, Journal of Political Economy 93(2), 223–247

Bruno, M. and Sachs, J. D. (1985), Economics of Worldwide Stagflation, Harvard University Press

Calvo, G. A. (1983), ‘Staggered prices in a utility-maximizing framework’, Journal of Monetary Economics 12, 383–398

Dias, F., Esteves, P. and F´elix, R. M. (2004), Revisiting the NAIRU estimates for the Portuguese economy, in B. de Portugal, ed., ‘Economic Bulletin’, Banco de Portugal, pp. 39–48

Evans, G. W. and Honkapohja, S. (2001), Learning and Expectations in Macroeconomics, Princeton University Press

Gaspar, V. and Luz, S. (1997), ‘Unemployment and wages in Portugal’, Economic Bulletin 3(4), 27–32

Harrison, R., Nikolov, K., Quinn, M., Ramsay, G., Scott, A. and Thomas, R. (2005), The Bank of England Quarterly Model, Bank of England

Hubbard, R. G., Kashyap, A. K. andWhited, T. M. (1993), Internal finance and firm investment, Working Paper 4392, NBER

Juillard, M., Laxton, D., McAdam, P. and Pioro, H. (1998), ‘An algorithm competition: first-order iteration versus Newton-based techniques’, Journal of Economic Dynamics and Control 22, 1291–1318

Kilponen, J., Kontulainen, J., Rippati, A. and Vilmunen, J. (2004), Introduction to AINO and some experiences from forecasting with DGE models, in mimeo, Bank of Finland

Kortelainen, M. (2002), Edge: A model of the euro area with applications to monetary policy, Bank of Finland Studies E:23, Bank of Finland

Kuismanen, M. and Pistaferri, L. (2005), Information, habits, and consumption behaviour: evidence from microdata., in mimeo

Laxton, D. and Pesenti, P. (2003), ‘Monetary rules for small, open, emerging economies’, Journal of Monetary Economics (50), 1109–1146

Luz, S. and Pinheiro, M. (1993), ‘Desemprego, vagas e crescimento salarial’, Boletim Trimestral 15(2), 41–51

Marques, C. R. and Botas, S. (1997), Estimation of the NAIRU for the Portuguese economy, Working Paper 6-97, Banco de Portugal

Rotemberg, J. (1982), ‘Monopolistic price adjustment and aggregate output’, Review of Economics Studies 49(158), 517–531

Rotemberg, J. (1987), The New Keynesian Microfoundations, NBER

Sefton, J. and in’t Veld, J. (1999), ‘Consumption and wealth: an international comparison’, The Manchester School 67(4), 522–544

Tarkka, J., Willmann, A. and Rasi, C. M. (1990), Production and employment, the BOF4 quarterly model of the Finnish economy, Bank of Finland Studies D:73, Bank of Finland

Walsh, C. (1998), Monetary Theory and Policy, The MIT Press