Convertibility and Stability 1834-1994: Portuguese Currency Experience Revisited

• Autor(a) principal: Braga de Macedo, Jorge
• Data de Publicação: 1995
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/87918

In this paper, the period since 1834 is divided according to the monetary and exchange rate regime prevailing in Portugal. Stability is associated with convergence to the European average in terms of both growth and inflation whereas the effect of instability is visible on growth divergence and higher inflation, together with much higher deficits and greater government turnover. The effect of convertibility is to allow higher deficits and debt, at least when stability prevails. As the combination of inconvertibility and stability was recorded during about one half of the period, the tolerance towards inconvertibility was almost as strong as the preference for stability, four fiths of the time. The reason for the peculiar combination of stability and convertibility observed in Portugal may also reflect the fact that convertibility was a risky option for an authoritarian political regime. The three regime changes towards convertibility were gradual; they proved a necessary but not sufficient condition for stability. In 1931 and in 1992, the system itself was in turmoil shortly after the regime change. The regime change criterion is related to the ability to maintain a stable exchange rate and low inflation over several years and this requires more than budgetary consolidation. In effect it requires a reputation for financial stability which Portugal acquired in 1992, the year in which inflation fell to single digits and the currency became fully convertible. The rule of exchange rate stability does not necessarily follow from membership in the European Monetary System: fiscal discipline must be domestically generated. The best international financial markets can do is help making the regime changes known. Revisiting the Portuguese currency experience 140 years after joining the gold standard and 70 years after Alvaro de Castro stabilized the escudo shows that the neglect of policy issues such as convertibility throughout the post-war period hindered the understanding of national economic development.