Fiscal multipliers in Portugal using a threshold approach

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

With Portugal in the midst of a huge economic crisis, many have proposed different solutions for the Portuguese problem. Being in the middle of an economic adjustment and after receiving assistance from external institutions, restoring the sustainability of national accounts has been the main priority. Fiscal consolidation has been made through cuts in public expenditure and higher government revenues. In this paper, using a TVAR framework, the effect of fiscal shocks in the real economy will be analyzed and fiscal multipliers will be estimated in periods of recession and expansion. Austerity measures that were taken by the Portuguese government will also be scrutinized and new possible scenarios will be added. The main finding of this paper is that Portugal should not only take measures regarding public deficit but must also implement measures that foster growth, especially through public expenditure.