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The M Model: a macroeconomic model for the Portuguese economy

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Macroeconomic models offer valuable insights to improve economic reasoning and to help interpreting agents’ behaviour, albeit being an imperfect representation of reality. This article presents a general description of the current version of the M model, a macroeconomic quarterly model for the Portuguese economy, which has been developed at the Economics and Research Department of Banco de Portugal since the early 2000’s. This semi-structural model embodies a compromise between theoretical foundations, anchored on the so-called neoclassical synthesis, and a more flexible approach to better fit the data. This type of models remains a common and useful tool, due to its pragmatic approach to the changing economic reality. The interconnectedness of economic relations is considered through linkages between the several blocks of the model, which include demand, supply, wages, prices, labour market, financial and fiscal variables. The M model is used for different purposes and is part of the toolkit for projection exercises and scenario analyses. An illustration of its dynamic properties in the short and medium term is provided through the simulation of five shocks: foreign demand, public consumption, exchange rate, oil price and interest rate.
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