Working Paper: NBER ID: w23960
Authors: Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi
Abstract: This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing---such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates.
Keywords: Market Reforms; Zero Lower Bound; Monetary Policy; Structural Reforms
JEL Codes: E24; E32; E52; F41; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Product market reforms (E69) | Stronger economic impacts during a recession when the ZLB is binding (F69) |
| Product market reforms (E69) | Counter potential deflationary effects (E31) |
| Product market reforms (E69) | Higher marginal costs (D40) |
| Employment protection legislation reform (E69) | Job creation (J23) |
| Reduction in unemployment benefits (J65) | Beneficial effects on consumption and investment (E21) |
| ZLB (E62) | Stronger impacts of reforms (E69) |