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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 06 de 1998


The Stability Pact and Portuguese Fiscal Policy: The Application of a VAR Model

Carlos Fonseca Marinheiro
Faculdade de Economia, Universidade de Coimbra

The Treaty on European Union forbids the Member States from incurring excessive government deficits. That prohibition is re-stated in the Stability and Growth Pact. The latter regulates the excessive deficit procedure. This regulation is analysed in detail. It brings us to the conclusion that its practical implementation shall lead the Member States to achieve the medium-term budgetary objective of close to balance or in surplus, so that automatic stabilisers can work without exceeding the 3% reference value for the deficit.
Next, whether stabilisation of the Portuguese economy has been achieved through the use of the budget expenditure or through the use of the receipts is evaluated. The correlation coefficients of the cyclical components of these variables with cyclical output are analysed. A VAR model between the output gaps of these three variables is also estimated. It seems justified to conclude, for the Portuguese economy, between 1953 and 1996, that the contribution of receipts to output stabilisation (achieved by the fiscal policy) has been greater than that of public expenditure.

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