We investigate the importance of the behaviour of the monetary authority for the dynamics of a currency union where cross-country asymmetries are not necessarily reflected in differences in economic size. We construct a stylised two-country general equilibrium model with sticky-prices to serve...

This paper develops a model of a small open economy integrated in a monetary union. The model incorporates the standard nominal and real frictions in the literature. The parameters of the model are calibrated to the Portuguese data and the effects of the standard monetary policy shock are studied.

Population ageing is a key trend in Western economies. The impact of this trend will be widespread, affecting investment and saving decisions over the next decades, and represents a major challenge to policymakers. Debt sustainability issues in euro area economies may (re)emerge, particularly...

This article presents a detailed description of PESSOA - Portuguese Economy Structural Small Open Analytical model. PESSOA is a dynamic general equilibrium model that can be applied to any small economy integrated in a monetary union. The main theoretical reference behind its structure is...

Using PESSOA, a medium-scale DSGE model for a small euro-area economy, we evaluate how scal adjustments impact short- and medium-term debt dynamics and output for alternative policy options, and budgetary and economic conditions. Fiscal djustments may increase the public debt-to-GDP ratio in the...

This paper develops a new measure of quarterly discretionary tax shocks for Portugal that result from changes in legislation, following the narrative approach. It covers the years from 1996 to 2012 and was based on a comprehensive analysis of tax policy measures taken in the course of this...

We investigate the reaction of output to government spending shocks at the zero lower bound (ZLB) on the nominal interest rate when government and private consumption are non-separable in preferences. In particular, substitutability between private and government consumption significantly...

In this paper, we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider an environment with monopolistic competitive firms, a shopping time technology, prices set one period in advance, and government expenditures that must be...

We study environments with sticky prices, wages or portfolios where it is feasible and optimal to use monetary policy to replicate the allocation under full flexibility. In these environments the optimal policy does not depend on the scope of the frictions. In this sense, the strength of the...

What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy isconducted with interest rate rules. We show that the appropriate interestrate...