The Portuguese Slump-Crash and the Euro-Crisis

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Date Published 2013
Primary Author Ricardo Reis
Other Authors
Theme Comparing Housing Finance Systems
Country Portugal


Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression or than Japan during the Lost Decade. This paper asks why this happened. It makes four contributions. First, it describes the main facts between 2000 and 2007, proposing a narrative for why the country did not grow. Second, it puts forward a model of credit frictions where capital inflows are misallocated, so that more integrated capital markets can lead to losses in productivity and an expansion of unproductive nontradables at the expense of productive tradables. Third, it argues that this model can account for the Portuguese slump, as a result of misallocated capital in flows and increases in taxes. Fourth, it shows that the crash after 2010 came with a sudden stop of capital flows, combined with fi scal austerity, downward nominal rigidities, and a diabolic loop between banks and sovereigns.

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