The effects of monetary policy in a small open economy: the case of Portugal

Abstract

In this article, I analyse the macroeconomic effects of monetary policy on the Portuguese economy. I show that a positive interest rate shock leads to: (i) a contraction of real GDP and a substantial increase of the unemployment rate; (ii) a quick fall in the commodity price and a gradual decrease of the price level and (iii) a downward correction of the stock price index. It also produces a 'short-lived liquidity effect' and helps explain the negative comovement between bonds and stocks. In addition, I find evidence suggesting the existence of a money demand function characterized by small output and interest rate elasticities. By its turn, the central bank's policy rule follows closely the dynamics of the money markets. Finally, both the real GDP and the price level in Portugal would have been higher during almost the entire sample period if there were no monetary policy surprises.

Fiscal and monetary policies in the BRICS: A panel VAR approach

“…Therefore, they are approximately one standard error above and below the central line, so that the gap between the two lines is about two standard errors. This setup is also in line with the works of Leeper and Zha (2003), Sousa (2010Sousa ( , 2014aSousa ( , 2014b, Sousa (2011, 2012), Sousa (2011, 2013), and Mallick andSousa (2012, 2013) among others.…”

“…In line with the works of Christiano et al (2005), Mallick andSousa (2012, 2013) and Sousa (2010Sousa ( , 2014aSousa ( , 2014b, we consider that the real GDP and the price deflator react to monetary policy only with a lag, while the growth rate of the monetary aggregate (M2) responds contemporaneously to the monetary policy shock. These variables are commonly used in the monetary business cycle literature.…”

Monetary and fiscal policy effects in South African economy

“…The reduced-form residual for the interest rate is given by:where uti is the structural orthogonal interest rate shock. The restrictions of zeroes in the first four rows and columns of A and B matrices are standard ones in the literature on monetary SVARs, that is, we specify a recursive structure to identify the monetary policy shock in our SVAR model as in Christiano et al (2005), Haug and Smith (2012) and Sousa (2010, 2014a, 2014b). We consider that real GDP and inflation react to monetary policy only with a lag.…”

On the Macroeconomic and Wealth Effects of Unconventional Monetary Policy

“…This procedure assumes that X t can be split into the set of variables that respond to the unconventional monetary policy shock with a lag (X 1t ), the monetary policy instrument (in our case, the growth rate of the central bank reserves), and another set of variables that react 1gcontemporaneously to the policy shock (X 2t ). The approach is similar to the works of Christiano et al (1996Christiano et al ( , 2005, Sousa (2010Sousa ( , 2014aSousa ( , 2014b, and Mallick and Sousa (2012) for the case of conventional monetary policy. However, in this paper, we implement it in the context of unconventional monetary policy.…”