Structural reforms at the zero lower bound

This section discusses the impact of structural reforms on economic activity in the short term in a macroeconomic environment in which the zero bound on monetary policy rates is temporarily binding, ruling out further standard monetary expansion to accommodate supply-side policies. Comparing recent academic contributions that portray structural reforms as counter-productive at the current juncture with QUEST model results suggests that the short-term output effects of reforms can be negative because of the real interest rate effect. However, negative effects are small in a model environment such as QUEST that incorporates a larger number of transmission channels. Short-term effects also depend on the specific reform measures. QUEST results, furthermore, do not support the idea that delaying structural reforms for the foreseeable future would improve economic conditions at the zero bound. The policy implications are that warnings of adverse effects from structural reforms at the current juncture appear to overemphasise potential short-term costs and that postponing reforms is not a good alternative.