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Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment

Author

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  • Mohr, Matthias
  • Jacquinot, Pascal
  • Pisani, Massimiliano
  • Gomes, Sandra

Abstract

We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects. JEL Classification: C53, E52, F47

Suggested Citation

  • Mohr, Matthias & Jacquinot, Pascal & Pisani, Massimiliano & Gomes, Sandra, 2011. "Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment," Working Paper Series 1323, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111323
    Note: 79802
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    References listed on IDEAS

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    More about this item

    Keywords

    competition; dynamic general equilibrium modeling; Economic policy; markups; monetary policy; structural reforms;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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