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Fiscal consequences of structural reform under constrained monetary policy

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  • Sajedi, Rana

Abstract

Structural reforms, in particular reductions in mark-ups in product and labour markets, can entail short run output costs unless offset by a demand expansion. When monetary policy is constrained and cannot carry out this short run expansion, there is a potential role for fiscal policy. Although this idea has received a lot of attention in the policy debate, there has been little formal study of the fiscal consequences of reforms under constrained monetary policy. This paper uses a model to quantify the short run fiscal costs and long run fiscal benefits of reforms, in order to see to what extent the latter justify the former. The fiscal costs and benefits of reforms are both generally found to be small, although larger reforms entail larger rises in deficit-to-GDP in the short run. Results suggest that reforms in labour markets have little effect on public finances in the long run, but their short run costs can be ameliorated if combined with product market reforms.

Suggested Citation

  • Sajedi, Rana, 2018. "Fiscal consequences of structural reform under constrained monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 22-38.
  • Handle: RePEc:eee:dyncon:v:93:y:2018:i:c:p:22-38
    DOI: 10.1016/j.jedc.2018.01.031
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    Cited by:

    1. Varthalitis, Petros, 2019. "FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland," MPRA Paper 93059, University Library of Munich, Germany.
    2. De Grauwe, Paul & Ji, Yuemei, 2017. "Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model," CEPR Discussion Papers 12336, C.E.P.R. Discussion Papers.
    3. Paul De Grauwe & Yuemei Ji, 2017. "Analyzing Structural Reforms Using a Behavioral Macroeconomic Model," CESifo Working Paper Series 6518, CESifo Group Munich.

    More about this item

    Keywords

    Structural reform; Fiscal policy; Monetary policy constraints;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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