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Fiscal consequences of structural reform under constrained monetary policy

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  • Sajedi, Rana

    () (Bank of England)

Abstract

Given the weak economic performance of many countries since the recent crisis, there is an increasing need for structural reforms aimed at promoting long-run economic growth. Structural reforms 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. In this case, reforms can go against fiscal consolidation in the short run, although they are expected to improve public finances in the long run. The aim of this paper is to quantify the short-run fiscal costs and long-run fiscal benefits of reforms, and investigate how the design of reforms can affect this trade-off. The focus is on the euro area, which has been particularly affected by high unemployment. In the model, both the costs and benefits of reforms are generally small, although increasingly large 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 by combining them with product market reforms.

Suggested Citation

  • Sajedi, Rana, 2016. "Fiscal consequences of structural reform under constrained monetary policy," Bank of England working papers 620, Bank of England.
  • Handle: RePEc:boe:boeewp:0620
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    References listed on IDEAS

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    5. Roel M. W. J. Beetsma & Xavier Debrun, 2004. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 431-456, November.
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    Cited by:

    1. 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; effective lower bound;

    JEL classification:

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

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