The Portuguese Disinflation Process: Analysis of Some Costs and Benefits

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.Monetary Policy, European Union, Disinflation, Co-Integration, Near-VAR and Simulation

Purchasing power parity: an empirical study of three EMU countries

We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.Purchasing Power Parity, Unit Roots, EMU, Economic Integration and Co-integration

Purchasing power parity: an empirical study of three EMU countries

We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.Purchasing Power Parity, Unit Roots, EMU, Economic Integration and Co-integration

How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects

This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal.Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots

How the Gold Standard Functioned in Portugal: An Analysis of Some Macroeconomic Aspects

The purpose of this study is to improve understanding of the gold standard period in Portugal through comparison with other monetary systems that were operated afterwards. Portugal was the first country in Europe to join Great Britain in the gold standard, in 1854, and it adhered to it for quite a long time. The principle of free gold convertibility of the Portuguese currency at a fixed price was abandoned in 1891, even though the classical gold standard as an international monetary system only began to fall apart as a result of the upheavals of the First World War. For the purposes of a macroeconomic study, we can thus first look at the expansion of the functioning of the gold standard in Portugal up to 1913. In addition to a desire to share the same monetary system as its trading and financial partner, the low price of gold and the domestic circulation of British gold coins also played a part, along with other factors, in the adoption of the gold standard in Portugal. While it was in force, it provided a nominal stable anchor and a mechanism of credible commitment, even though Portugal’s monetary authorities broke the “rules of the game”. Our analysis points out the mistake of comparing the stability of different monetary systems with the same indicators. The application of a VAR model enabled us to isolate the period 1854-1891 as being the one that actually corresponds to what we expect of gold standard behaviour. Examination of demand, supply and monetary shocks yields interesting results that confirm the idea that the principles of classical economics are appropriate for the gold standard period.Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR, Unit Roots

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.Budget deficit, cyclically adjusted budget balance, fiscal policy, Hodrick-Prescott filter and output gap.

Application of adaptive methods based on finite difference discretizations to systems of PDAEs

In this paper two adaptive algorithms are presented for the solution of systems of evolutive one-dimensional Partial Differential/ AIgebraic Equations (PDAEs). A spatial discretization based on finite difference approximations on arbitrarily spaced grids: transforms the original problem in a set of Ordinary Differential Equations (ODEs), solved via an implicit integrator package (DASSL). The temporal integration is coupled with a spatial adapting strategy. The identification of the spatial subdomains: where the introduction of grid adaptivity is needed, is done through the comparison of the solutions computed with two fixed grids of different sizes. The subproblems generated are solved by two adaptive strategies: the Grid Refinement Method (GRM), that refines the subgrids detected in the previous step, and the Moving Mesh Method (MMM), that includes an additional differential equation for the nodal mobility in each original subproblem. In this paper, these algorithms were successfully applied to the solution of two problems: an isothermal tubular reactor model and a fiame propagation system described by two PDEs referring to fuel mass density and temperature dynamics. The performance of each algorithm is compared to the results obtained by Duarte [1], based on the application of a formulation of the Moving Finite Elements Method, with cubic Hermite polynomials approximations. The MMM algorithm revealed its robustness in dealing with the chosen models. The GRM algorithm originated poorer results, mainly due to errors associated with the boundary conditions procedure

Adaptive collocation methods for the numerical solution of differential models

A PDE integration algorithm that associates a Method of Lines (MOL) strategy based on finite differences or high resolution space discretizations, with a collocation strategy based on increasing level one or two-dimensional dyadic grids is presented. It reveals potential either as a grid generation procedure for predefined steep localised functions, and as an integration scheme for moving steep gradient PDE problems, namely 1D and 2D Burgers equations. Therefore, it copes satisfactorily with an example characterized by a steep 2D travelling wave and an example characterised by a forming steep travelling shock, which confirms its flexibility in dealing with diverse types of problems, with reasonable demands of computational effort

Adaptive collocation methods for the solution of partial differential equations

An integration algorithm that conjugates a Method of Lines (MOL) strategy based on finite differences space discretizations, with a collocation strategy based on increasing level dyadic grids is presented. It reveals potential either as a grid generation procedure and a Partial Differential Equation(PDE) integration scheme. It copes satisfactorily with a example characterized by a steep travelling wave and a example that presented a forming steep shock, which demonstrates its versatility in dealing with different types of steep moving front problems, exhibiting features like advection-diffusion, widely common in the standard Chemical Processes simulation models

Application of adaptive methods based on finite difference discretizations in the simulation of a tubular reactor system

In this paper two adaptive algorithms are presented for the solution of systems of evolutive one-dimensional Partial Differential/ Algebraic Equations (PDAEs). The temporal integration is coupled with a spatial adapting strategy. The identification of the spatial subdomains. where a regridding technique is introduced, is done through the comparison of the solutions computed with two fixed grids of different sizes. The subproblems generated are solved by two adaptive strategies: the Grid Refinement Method (GRM), that promotes the refinement of the subgrids detected in the previous step, and the Moving Mesh Method (MMM) includes an additional differential equation for the nodal mobility. The two algorithms proposed were successfully applied to the solution of an nonisothermal tubular reactor pseudo-homogeneous model described by two PDEs referring to reagent concentration and system temperature dynamics. The performance of each algorithm is compared to the results obtained by [3], based on the application of a formulation of the Moving Finite Elements Method, with cubic Hermite polynomials approximations