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Analyzing Structural Reforms Using a Behavioral Macroeconomic Model

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  • Paul De Grauwe
  • Yuemei Ji

Abstract

We use a behavioral macroeconomic model to analyze how structural reforms affect the economy in the short and in the long run. We consider two types of structural reforms. The first one increases the flexibility of wages and prices; the second one raises potential output in the economy. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. In addition, a structural reform program that raises potential output has a stronger long-term effect on output and tends to reduce the price level more in a flexible than in a rigid economy. Finally, we analyze how structural reforms change the tradeoffs between output and inflation variability. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms).

Suggested Citation

  • Paul De Grauwe & Yuemei Ji, 2017. "Analyzing Structural Reforms Using a Behavioral Macroeconomic Model," CESifo Working Paper Series 6518, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6518
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6518.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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 for the Study of Labor (IZA).

    More about this item

    Keywords

    animal spirits; structural reforms; monetary policy;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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