A Three-Country Macroeconomic Model for Portugal

IMF Working Papers, December 20, 2019

Source details

Outlines a simple three-country macroeconomic model designed to focus on the transmission of external shocks to Portugal.
Builds on the framework developed by Berg et al (2006).
Differentiates between shocks originating from:
- inside the euro area,
- outside the euro area,
- domestic shocks.
Model designed to guide forecasts and undertake simulations.
Model can easily be modified for use in other small euro area countries.

External shocks from different origins have distinct implications for Portugal.
The framework is used to consider the dynamics of the Portuguese economy over recent decades.
Emphasis on transmission mechanisms affecting:
- Exchange rates,
- Real exchange rates,
- Real interest rates,
- Inflation and inflation dynamics,
- Output gap and output gap dynamics,
- Prices and production.

Builds on prior framework (Berg et al (2006)).
Uses a model structure suitable for forecasting and simulation exercises.
Relevant technical elements and keywords explicitly noted:
- accommodative monetary policy stance, Bayesian estimation, demand shock, euro area, Exchange rates, Global, higher-than-trend inflation, Inflation, inflation dynamics, inflation expectation, inflation shock, interest rate gap, macroeconomic modeling, Output gap, output gap dynamics, Portugal, price level, reaction function, Real exchange rates, Real interest rates, transmission mechanism.

Guides forecasts for the Portuguese economy.
Supports simulations to assess impacts of external and domestic shocks.
Adaptable for policy analysis in other small euro area economies given structural similarities.

IMF Working Paper — "A Three-Country Macroeconomic Model for Portugal" by Alex Pienkowski, Working Paper No. 2019/281, December 20, 2019.