Money supply and macroeconomic performance under the New State

Abstract

This article examines two questions related to the evolution of money supply in Portugal during a period which corresponds approximately to the New State: (i) what factors determined its evolution, (ii) what was the relationship between the behaviour of money supply and macroeconomic performance in terms of real output and the general behaviour of price levels? Although the behaviour of the public in dividing their money between bank notes and deposits and the behaviour of the banks in respect of their liquidity levels exerted a significant influence on the evolution of the money supply in certain periods, the determining factor was the Bank of Portugal's accommodation of the balance of payments. We find that, except during the Second World War, exchange was not the «cause», in the sense used by granger, of the behaviour of price levels. The empirical evidence available also allows us to conclude that in the post-war period the growth of money supply «caused» growth in real output. Finally, it cannot be concluded that there is a causal link between output and money supply.