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Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies

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  • Cacciatore, Matteo
  • Duval, Romain
  • Fiori, Giuseppe
  • Ghironi, Fabio

Abstract

This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms – such as reductions in employment protection – increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath – either because of the zero bound on policy rates or because of the membership in a monetary union – may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.

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  • Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
  • Handle: RePEc:eee:jimfin:v:68:y:2016:i:c:p:358-385
    DOI: 10.1016/j.jimonfin.2016.02.010
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    Cited by:

    1. Peter N. Gal & Alexander Hijzen, 2016. "The Short-Term Impact of Product Market Reforms; A cross-country firm-level analysis," IMF Working Papers 16/116, International Monetary Fund.
    2. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Banking and Financial Participation Reforms, Labor Markets, and Financial Shocks," MPRA Paper 88697, University Library of Munich, Germany.
    3. Zhou, Siwen, 2019. "Assessing the Macroeconomic Impact of the ECB’s Asset Purchase Programme in a Dynamic Nelson–Siegel Modelling Framework," MPRA Paper 92530, University Library of Munich, Germany.
    4. Masuch, Klaus & Anderton, Robert & Setzer, Ralph & Benalal, Nicholai, 2018. "Structural policies in the euro area," Occasional Paper Series 210, European Central Bank.
    5. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market reforms in the time of imbalance," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 69-93.
    6. Piton, Céline & Rycx, Francois, 2018. "The Unemployment Impact of Product and Labour Market Regulation: Evidence from European Countries," IZA Discussion Papers 11582, Institute of Labor Economics (IZA).
    7. Luis M. Cubeddu & Signe Krogstrup & Gustavo Adler & Pau Rabanal & Mai Chi Dao & Swarnali Ahmed Hannan & Luciana Juvenal & Carolina Osorio Buitron & Cyril Rebillard & Daniel Garcia-Macia & Callum Jones, 2019. "The External Balance Assessment Methodology: 2018 Update," IMF Working Papers 19/65, International Monetary Fund.
    8. Romain Bouis & Romain A Duval & Johannes Eugster, 2016. "Product Market Deregulation and Growth; New Country-Industry-Level Evidence," IMF Working Papers 16/114, International Monetary Fund.
    9. repec:sae:ilrrev:v:72:y:2019:i:1:p:127-157 is not listed on IDEAS
    10. Rahul Anand & Purva Khera, 2016. "Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India," IMF Working Papers 16/47, International Monetary Fund.
    11. Lise Patureau & Céline Poilly, 2018. "Reforms and the Real Exchange Rate: The Role of Pricing-to-Market," AMSE Working Papers 1834, Aix-Marseille School of Economics, France.
    12. Campos, Nauro F & De Grauwe, Paul & Ji, Yuemei, 2017. "Structural Reforms, Growth and Inequality: An Overview of Theory, Measurement and Evidence," IZA Discussion Papers 11159, Institute of Labor Economics (IZA).
    13. Ciccarelli, Matteo & Osbat, Chiara, 2017. "Low inflation in the euro area: Causes and consequences," Occasional Paper Series 181, European Central Bank.
    14. Céline Piton, 2018. "The unemployment impact of product and labour market regulation: Evidence from European countries," Working Paper Research 343, National Bank of Belgium.
    15. Andrea Bassanini & Federico Cingano, 2019. "Before It Gets Better: The Short-Term Employment Costs of Regulatory Reforms," ILR Review, Cornell University, ILR School, vol. 72(1), pages 127-157, January.
    16. Yu-Fu Chen & Michael Funke, 2017. "Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area," Open Economies Review, Springer, vol. 28(2), pages 297-318, April.
    17. Luís A. V. Catão, 2018. "Reforms and External Balances in Southern Europe and Ireland," Working Papers REM 2018/27, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    18. Vitor Gaspar & Maurice Obstfeld & Ratna Sahay & Douglas Laxton & Dennis P Botman & Kevin Clinton & Romain A Duval & Kotaro Ishi & Zoltan Jakab & Laura Jaramillo & Constant A Lonkeng Ngouana & Tommaso , 2016. "Macroeconomic Management When Policy Space is Constrained; A Comprehensive, Consistent and Coordinated Approach to Economic Policy," IMF Staff Discussion Notes 16/09, International Monetary Fund.
    19. Alexander Culiuc & Annette J Kyobe, 2017. "Structural Reforms and External Rebalancing," IMF Working Papers 17/182, International Monetary Fund.
    20. Céline Piton, 2018. "The unemployment impact of product and labour market regulation: Evidence from European countries," Working Paper Research 343, National Bank of Belgium.

    More about this item

    Keywords

    Structural reforms; Employment protection; Firm entry; Product market regulation; Unemployment benefits;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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