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Short-Term Gain or Pain? A DSGE Model-Based Analysis of the Short-Term Effects of Structural Reforms in Labour and Product Markets

Listed author(s):
  • Matteo Cacciatore

    (HEC Montreal)

  • Romain Duval


  • Giuseppe Fiori

    (University of São Paulo)

This paper explores the short-term effects of labour and product market reforms through a dynamic general equilibrium model that features endogenous producer entry, equilibrium unemployment and costly job creation and destruction. Unlike in existing work, the link between labour and product market dynamics and the policy factors driving it are modelled explicitly. The analysis yields three main findings. First, it takes time for reforms to pay off, typically at least a couple of years. This is partly because their benefits materialise through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Second, all reforms appear to stimulate GDP already in the short run, but some of them -- such as job protection reforms -- are found to increase unemployment temporarily. Implementing a broad package of labour and product market reforms enables governments to minimise or even alleviate such transitional costs. Third, reforms are not found to 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 the country belongs to a large monetary union -- may not be a relevant obstacle to reform implementation. Alternative simple monetary policy rules have little impact on the transitional costs from reforms. Gain ou perte à court terme ? Une analyse à partir d'un modèle DSGE des effets de court terme des réformes sur les marchés du travail et des produits Cet article évalue les effets de court terme des réformes des marchés du travail et des produits à l’aide d’un modèle d’équilibre général dynamique incorporant une entrée endogène des firmes, un chômage d’équilibre et des coûts de création et destruction d’emplois. Contrairement aux travaux existants, le lien entre les dynamiques des marchés du travail et des produits et les facteurs politiques qui le gouvernent sont modélisés explicitement. L’analyse fournit trois conclusions principales. Premièrement, il faut du temps pour que les réformes paient, typiquement au moins quelques années. Deuxièmement, il apparaît que toutes les réformes stimulent le PIB dès le court terme, mais que certaines d’entre elles -- telles que les réformes de la protection de l’emploi -- augmentent le chômage temporairement. Mettre en oeuvre simultanément un ensemble de réformes des marchés du travail et des produits permet au gouvernement de minimiser voire d’éviter ces coûts transitoires. Troisièmement, les réformes n’apparaissent pas avoir d’effets déflationnistes majeurs, ce qui suggère que l’incapacité de la politique monétaire à mettre en oeuvre de fortes baisses de taux d’intérêt dans leur foulée -- soit du fait du plancher zéro sur les taux directeurs soit du fait de l’appartenance à une large zone monétaire -- n’est pas un obstacle pertinent à la mise en oeuvre des réformes. Des règles monétaires simples alternatives n’ont qu’un faible impact sur les coûts de transition des réformes.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 948.

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Date of creation: 26 Mar 2012
Handle: RePEc:oec:ecoaaa:948-en
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