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Structural Reforms in a Monetary Union: The Role of the ZLB

  • Andrea Raffo

    (Board of Governors of the Federal Reserv)

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

  • Gauti Eggertsson

    (Brown University)

Structural reforms that increase competition in product and labor markets may have large effects on the long-run level of output. We find that, in a medium scale DSGE model, a 10 percent reduction in product and labor markups increases output by nearly 7 percent after 5 years. The short-run transmission of these reforms, however, depends critically on the presence of the zero lower bound (ZLB). When monetary policy is at the ZLB, structural reforms may have perverse effects, as they increase deflationary pressures and delay the normalization of policy rates. Hence, contrary to conventional wisdom, we argue that labor market reforms should precede product market reforms.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 637.

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Date of creation: 2013
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Handle: RePEc:red:sed013:637
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Tamim Bayoumi & Douglas Laxton & Paolo Pesenti, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," International Finance Discussion Papers 803, Board of Governors of the Federal Reserve System (U.S.).
  2. Pedro Teles & Isabel Correia & Bernardino Adao, 2007. "On the Relevance of Exchange Rate Regimes for Stabilization Policy," 2007 Meeting Papers 616, Society for Economic Dynamics.
  3. Gauti B. Eggertsson, 2007. "Was the New Deal Contractionary?," 2007 Meeting Papers 660, Society for Economic Dynamics.
  4. Lipińska, Anna & von Thadden, Leopold, 2009. "Monetary and fiscal policy aspects of indirect tax changes in a monetary union," Working Paper Series 1097, European Central Bank.
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