The M model, a quarterly macroeconomic model for the Portuguese economy, is one of the key elements of Banco de Portugal’s projection exercises and scenario analyses. Based on its short- and medium-run dynamic properties, it is possible to assess the mechanical impact of economic shocks in the evolution of the main variables of the Portuguese economy.

As an illustration, the chart presents the impact of an increase of 1% in the foreign demand in a set of variables. The increase in foreign demand for Portuguese goods and services triggers an increase in exports, in employment, in disposable income and in domestic demand. Imports also increase, reflecting the higher final demand. Higher pressures from the demand side are associated with increases in wages and domestic prices. In the model, the rise in prices leads to a loss in competitiveness, which attenuates the impact on exports from the foreign demand shock. Overall, the trade account balance improves in the medium run. In the third year of the simulation horizon, the impact on GDP is about 0.3%.

For more details see “The M Model: a macroeconomic model for the Portuguese economy”, Banco de Portugal Economic Studies, Vol. IX, No. 2, pp. 3-27.

Prepared by Gabriela Castro and Cláudia Duarte. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

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