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Structural Reforms in a Monetary Union: The Role of the ZLB

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  • Andrea Raffo

    (Board of Governors of the Federal Reserv)

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

  • Gauti Eggertsson

    (Brown University)

Abstract

Structural reforms that increase competition in product and labor markets may have large effects on the long-run level of output. We find that, in a medium scale DSGE model, a 10 percent reduction in product and labor markups increases output by nearly 7 percent after 5 years. The short-run transmission of these reforms, however, depends critically on the presence of the zero lower bound (ZLB). When monetary policy is at the ZLB, structural reforms may have perverse effects, as they increase deflationary pressures and delay the normalization of policy rates. Hence, contrary to conventional wisdom, we argue that labor market reforms should precede product market reforms.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 637.

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Date of creation: 2013
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Handle: RePEc:red:sed013:637

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  1. Bayoumi, Tamim & Laxton, Doug & Pesenti, Paolo, 2004. "Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment," CEPR Discussion Papers 4481, C.E.P.R. Discussion Papers.
  2. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2006. "On the Relevance of Exchange Rate Regimes for Stabilization Policy," Working Papers w200616, Banco de Portugal, Economics and Research Department.
  3. Gauti B. Eggertsson, 2006. "Was the New Deal contractionary?," Staff Reports 264, Federal Reserve Bank of New York.
  4. Lipińska, Anna & von Thadden, Leopold, 2009. "Monetary and fiscal policy aspects of indirect tax changes in a monetary union," Working Paper Series 1097, European Central Bank.
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