## 5. Productivity Effects of Market Reforms ## Source details **Canonical URL:** [5. Productivity Effects of Market Reforms](https://www.imf.org/-/media/files/publications/wp/2017/wp17215.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2017/wp17215.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2017/wp17215.pdf.json) --- ### Context and research question - The paper studies short- to medium-run consequences of primitive changes in market regulation when the economy is in a deep recession that has triggered the ZLB on nominal interest rates. - Reform types analyzed: - Product market reform: reduction in regulatory costs of entry in the non-tradable sector. - Employment protection reform: reduction in firing costs. - Unemployment benefit reform: cut in the average replacement rate over an unemployment spell. - Two timing scenarios for each reform: - Normal times (economy not in recession, ZLB not binding). - Crisis with a binding ZLB. - Motivating facts and references include the protracted slowdown since the 2008-2009 global financial crisis and the debate on whether structural reforms have deflationary effects at the ZLB (Eggertsson (2010); Eggertsson, Ferrero and Raffo (2014, EFR)). ### Model structure and calibration - Model features: - Two-country (Home and Foreign), two-sector monetary union. - Endogenous producer entry (Bilbiie, Ghironi and Melitz (2012); Ghironi and Melitz (2005)). - Search-and-matching labor market with endogenous job creation/destruction (Mortensen and Pissarides (1994); den Haan, Ramey and Watson (2000)). - Nominal rigidities (Rotemberg price adjustment costs). - Translog preferences in the non-tradable sector to deliver endogenous markups and pro-competitive effects from entry. - Key calibration choices (period = quarter; sample: 1995:Q1–2013:Q1): - Discount factor: = 0:99. - Risk aversion: = 1. - Capital share parameter: = 0:33. - Capital depreciation rate: _K = 0:025. - Elasticity of marginal depreciation: & = 0:41. - Consumption habit: h_C = 0:6. - Elasticity of substitution tradable vs non-tradable: _N = 0:5. - Elasticity of substitution across tradables: _T = 6 (baseline; alternative considered: 1:5). - Matching elasticity: " = 0:6. - Worker bargaining power set to satisfy Hosios condition:  = ". - Price adjustment cost scale:  = 80. - ZLB lower bound: i_zlb = 0. - Trade iceberg costs set to  = 1 (law of one price). - Product market regulatory entry cost aggregate: 2 percent of GDP (implied firm-level loss ≈ 1.3 months of steady-state firm output). - Firm exit rate calibrated so gross steady-state job destruction due to exit = 25 percent. - Unemployment benefit replacement rate: baseline b / ~w = 32 percent; U.S.-level used in reform counterfactual: 28 percent. - Vacancy posting cost calibrated so steady-state hiring cost = 13 percent of average wage. - Target labor-market and macro moments: steady-state unemployment U = 0:09; vacancy fill q = 0:6; total separation rate _tot = 0:036. - Solution method: - Nonlinear, perfect-foresight transition via Newton-Raphson for large permanent shocks. - Stochastic dynamics solved around calibrated steady state for other experiments. ### Main findings — normal times (ZLB not binding) - General conclusion: - Business cycle conditions at the time of deregulation matter for short- to medium-run responses; reforms do not universally produce deflationary short-run effects. - Product market reform (lower entry barriers): - Short-run: output and inflation increase on impact. - Mechanism: entry raises demand for factors, raises marginal costs; incumbents downsize raising average wages; producer entry requires firms to purchase final output (sunk entry costs), temporarily boosting demand. - Transition: higher unemployment initially from reallocation and gradual job creation; long-run increase in consumption and investment once new firms operate. - Long run: larger number of products → higher substitutability → lower markups → productivity gains; largest long-run labor productivity gains among reforms. - Employment protection (lower firing costs): - Short-run: employment, output, and consumption decrease initially because lower firing costs increase instantaneous job destruction before job creation ramps up. - Inflation: essentially unchanged (offsetting forces: lower aggregate demand vs higher marginal labor costs as low-productivity matches are destroyed and survivors are better paid). - Transition: unemployment falls after about one year and GDP increases in the long run. - Unemployment benefit cuts (lower replacement rate): - Short-run and medium-run: do not produce contractionary short-term effects; unemployment gradually falls and output and investment increase. - Mechanism: lower outside option for workers raises firm surplus and job creation without increasing job destruction. - Inflation: muted aggregate effects due to offsetting wage moderation and increased labor demand. - Joint product-and-labor market reform: - Highly stimulative in the short run with inflationary pressure initially and immediate stimulation of output and employment. - Current account and terms-of-trade effects: - Market reforms in the model can produce stronger terms of trade and current-account deficits during transition (e.g., product market reform), which contrasts with reduced-form exogenous markup cuts that mechanically imply terms-of-trade depreciation and current-account improvement. ### Productivity effects (normal times) - Labor productivity measures preserved exactly: - Aggregate labor productivity: lp_t = Y_t / L_t. - Sectoral: lp_NT_t = (_N_t Y_N_t)/L_N_t; lp_T_t = ([_T_D;t (C_T_D;t + _t C_T_X;t) ] _N_t Y_N_T;t)/L_T_t. - Drivers of productivity dynamics: - Job destruction/creation → affects average match productivity ~z_t. - Variety gains in non-tradable sector → efficiency gains for production of both sectors. - Changes in capital per worker via time-varying capital utilization. - Quantitative pattern: - Product market deregulation → largest long-run productivity gains, strong short-run gains driven by higher capital utilization and input demand from entrants. - Lower firing costs → increases average productivity of surviving matches (more destruction of low-productivity matches) → stronger short-run productivity gains. - Lower unemployment benefits → small long-run productivity decline (larger pool of less-productive matches survives due to wage moderation). ### Findings at the ZLB (recession with binding ZLB) - Crisis setup: - Aggregate preference/risk-premium shock (_a;t) calibrated to reproduce a peak-to-trough euro-area output decline of about 4 percent after Lehman collapse and persistence such that the ZLB binds for approximately two years (8 quarters) absent reforms. - Central bank cuts policy rate to the ZLB and holds it there until constraint loosens. - Product market reform at the ZLB: - Reform is expansionary and can be more beneficial when the ZLB binds than in normal times. - Mechanism: reform is short-run inflationary (via factor demand and marginal cost effects), which lowers the real interest rate when nominal policy is constrained by the ZLB, stimulating investment and aggregate demand. - Net effect relative to no reform during crisis: faster recovery, smaller recessionary impact. - Firing-cost reduction at the ZLB: - Reform deepens the recession (more job destruction initially → lower aggregate demand); adverse short-run effects are present both with and without the ZLB. - Presence of the ZLB mitigates output and employment losses slightly; allowing the policy rate to go negative does not qualitatively change the adverse short-run dynamics. - Unemployment-benefit cuts at the ZLB: - Stimulative (boosts job creation) and effectiveness is not reduced by the ZLB; results similar with or without ZLB. - Potential caveat (model limitation): redistribution of saved fiscal resources and credit constraints are abstracted from; cuts could hurt credit-constrained households and curtail consumption in practice. - Joint reforms at the ZLB: - Joint product and labor market deregulation is especially stimulative during a ZLB recession. - General implication: - The ZLB per se does not make market reform contractionary; because reforms are not inherently deflationary in this model (some are inflationary in the short run), the binding constraint on monetary policy is not the key determinant — prevailing business cycle conditions are. ### Policy-relevant takeaways and caveats - Takeaways: - Evaluations of structural reforms should emphasize prevailing business cycle conditions rather than focusing solely on constraints on monetary policy (ZLB). - Product market deregulation and coordinated (product + labor) reforms can aid recovery when implemented during ZLB episodes because they can be short-run inflationary and thus lower real rates. - Labor-market reforms are heterogeneous: reducing firing costs can be contractionary in the short run; reducing unemployment benefits tends to stimulate job creation and output. - Micro-level modeling of entry, job creation/destruction, and endogenous markups is crucial: reduced-form exogenous markup cuts can misleadingly imply automatic deflationary effects at the ZLB. - Caveats and limitations noted by the authors: - The model does not include potential productivity gains from reduced X-inefficiency among incumbents or increased innovation; this may understate short-term effects of reforms. - Only one regulated non-tradable sector is modeled; entry costs and resource requirements vary by sector in practice (e.g., telecommunications vs taxis). - Welfare incidence: unemployment-benefit cuts may harm lower-income, credit-constrained households; the model abstracts from heterogeneous households and credit constraints. - The model treats unemployment benefits as lump-sum transfers in the representative-household framework; alternative fiscal financing or distributional channels could modify aggregate demand effects. ### Conclusion - Main conclusion: - Business cycle conditions at the time of deregulation matter for short- to medium-run outcomes; the presence of the ZLB does not by itself induce recessionary effects of market reforms. Some reforms can be more beneficial when the ZLB is binding (e.g., product market reform and joint deregulation), because reforms are not generally deflationary and can be short-run inflationary. - There is no simple across-the-board relationship between market reforms and the behavior of real marginal cost once primitive product and labor market dynamics are modeled. *Source: wp17215 - 5. Productivity Effects of Market Reforms (IMF working paper).* ### 1. Introduction ........................................................................................................ ### 1. Introduction ............................................................................................................................. 3 ### Major Sections (document structure) - 1. Introduction ............................................................................................................................. 3 - 2. The Model ............................................................................................................................... 7 - 3. Monetary Policy .....................................................................................................................22 - 4. Calibration..............................................................................................................................24 - 5. Market Reforms in Normal Times .........................................................................................27 - 6. Market Deregulation at the Zero Lower Bound .....................................................................31 - 7. Conclusions ............................................................................................................................35 - References ..................................................................................................................................35 ### Tables (listed in the content unit) - 1. Model Equations ....................................................................................................................41 - 2. Calibration .............................................................................................................................42 ### Figures (listed in the content unit) - 1. Reduction in Barriers to Entry ...............................................................................................43 - 2. Reduction in Firing Cost .......................................................................................................44 - 3. Reduction in Unemployment Benefit ....................................................................................45 - 4. Joint Deregulation .................................................................................................................46 *Source: wp17215 - 1. Introduction (IMF working paper PDF table of contents and list of tables/figures).* ### 5. Productivity Effects of Market Reforms ............................................................................. ### 5. Productivity Effects of Market Reforms ### Context and research question - The paper addresses the short- to medium-run consequences of primitive changes in market regulation when the economy is in a deep recession that has triggered the ZLB on nominal interest rates. - Motivating facts and references: - Protracted slowdown since the 2008-2009 global financial crisis. - Central concern: whether structural reforms have deflationary effects at the zero lower bound (ZLB) (Eggertsson (2010); Eggertsson, Ferrero and Raffo (2014, EFR)). - Reform types analyzed: - Product market reform: reduction in regulatory costs of entry in the non-tradable sector. - Employment protection reform: reduction in firing costs. - Unemployment benefit reform: cut in the average replacement rate over an unemployment spell. - Two timing scenarios for each reform: - Normal times (economy not in recession, ZLB not binding). - Crisis with a binding ZLB. ### Model structure and calibration - Model features: - Two-country (Home and Foreign), two-sector monetary union. - Endogenous producer entry (Bilbiie, Ghironi and Melitz (2012); Ghironi and Melitz (2005)). - Search-and-matching labor market with endogenous job creation/destruction (Mortensen and Pissarides (1994); den Haan, Ramey and Watson (2000)). - Nominal rigidities (Rotemberg price adjustment costs). - Translog preferences in the non-tradable sector to deliver endogenous markups and pro-competitive effects from entry. - Key calibration choices (period = quarter; sample: 1995:Q1–2013:Q1): - Discount factor: = 0:99. - Risk aversion: = 1. - Capital share parameter: = 0:33. - Capital depreciation rate:  K = 0:025. - Elasticity of marginal depreciation: & = 0:41. - Consumption habit: h C = 0:6. - Elasticity of substitution tradable vs non-tradable:  N = 0:5. - Elasticity of substitution across tradables:  T = 6 (baseline; alternative considered: 1:5). - Matching elasticity: " = 0:6. - Worker bargaining power set to satisfy Hosios condition:  = ". - Price adjustment cost scale:  = 80. - ZLB lower bound: i zlb = 0. - Trade iceberg costs set to  = 1 (law of one price). - Product market regulatory entry cost aggregate: 2 percent of GDP (implied firm-level loss ≈ 1.3 months of steady-state firm output). - Firm exit rate calibrated so gross steady-state job destruction due to exit = 25 percent. - Unemployment benefit replacement rate: baseline b / ~w = 32 percent; U.S.-level used in reform counterfactual: 28 percent. - Vacancy posting cost calibrated so steady-state hiring cost = 13 percent of average wage. - Target labor-market and macro moments: steady-state unemployment U = 0:09; vacancy fill q = 0:6; total separation rate  tot = 0:036. - Solution method: nonlinear, perfect-foresight transition via Newton-Raphson for large permanent shocks; stochastic dynamics solved around calibrated steady state for other experiments. ### Main findings — normal times (ZLB not binding) - General conclusion: - Business cycle conditions at the time of deregulation matter for short- to medium-run responses; reforms do not universally produce deflationary short-run effects. - Product market reform (lower entry barriers): - Short-run: output and inflation increase on impact. - Mechanism: entry raises demand for factors, raises marginal costs; incumbents downsize raising average wages; producer entry requires firms to purchase final output (sunk entry costs), temporarily boosting demand. - Transition: higher unemployment initially from reallocation and gradual job creation; long-run increase in consumption and investment once new firms operate. - Long run: larger number of products → higher substitutability → lower markups → productivity gains; largest long-run labor productivity gains among reforms. - Employment protection (lower firing costs): - Short-run: employment, output, and consumption decrease initially because lower firing costs increase instantaneous job destruction before job creation ramps up. - Inflation: essentially unchanged (offsetting forces: lower aggregate demand vs higher marginal labor costs as low-productivity matches are destroyed and survivors are better paid). - Transition: unemployment falls after about one year and GDP increases in the long run. - Unemployment benefit cuts (lower replacement rate): - Short-run and medium-run: do not produce contractionary short-term effects; unemployment gradually falls and output and investment increase. - Mechanism: lower outside option for workers raises firm surplus and job creation without increasing job destruction. - Inflation: muted aggregate effects due to offsetting wage moderation and increased labor demand. - Joint product-and-labor market reform: - Highly stimulative in the short run with inflationary pressure initially and immediate stimulation of output and employment. - Current account and terms-of-trade effects: - Market reforms in the model can produce stronger terms of trade and current-account deficits during transition (e.g., product market reform), which contrasts with reduced-form exogenous markup cuts that mechanically imply terms-of-trade depreciation and current-account improvement. ### Productivity effects (normal times) - Labor productivity measures: - Aggregate labor productivity: lp t = Y t / L t . - Sectoral: lp NT t = ( N t Y N t)/L N t ; lp T t = ([ T D;t (C T D;t +  t C T X;t) ]  N t Y N T;t)/L T t. - Drivers of productivity dynamics: - Job destruction/creation → affects average match productivity ~z t. - Variety gains in non-tradable sector → efficiency gains for production of both sectors. - Changes in capital per worker via time-varying capital utilization. - Quantitative pattern: - Product market deregulation → largest long-run productivity gains, strong short-run gains driven by higher capital utilization and input demand from entrants. - Lower firing costs → increases average productivity of surviving matches (more destruction of low-productivity matches) → stronger short-run productivity gains. - Lower unemployment benefits → small long-run productivity decline (larger pool of less-productive matches survives due to wage moderation). ### Findings at the ZLB (recession with binding ZLB) - Crisis setup: - Aggregate preference/risk-premium shock ( a;t) calibrated to reproduce a peak-to-trough euro-area output decline of about 4 percent after Lehman collapse and persistence such that the ZLB binds for approximately two years (8 quarters) absent reforms. - Central bank cuts policy rate to the ZLB and holds it there until constraint loosens. - Product market reform at the ZLB: - Reform is expansionary and can be more beneficial when the ZLB binds than in normal times. - Mechanism: reform is short-run inflationary (via factor demand and marginal cost effects), which lowers the real interest rate when nominal policy is constrained by the ZLB, stimulating investment and aggregate demand. - Net effect relative to no reform during crisis: faster recovery, smaller recessionary impact. - Firing-cost reduction at the ZLB: - Reform deepens the recession (more job destruction initially → lower aggregate demand); adverse short-run effects are present both with and without the ZLB. - Presence of the ZLB mitigates output and employment losses slightly; allowing the policy rate to go negative does not qualitatively change the adverse short-run dynamics. - Unemployment-benefit cuts at the ZLB: - Stimulative (boosts job creation) and effectiveness is not reduced by the ZLB; results similar with or without ZLB. - Potential caveat (model limitation): redistribution of saved fiscal resources and credit constraints are abstracted from; cuts could hurt credit-constrained households and curtail consumption in practice. - Joint reforms at the ZLB: - Joint product and labor market deregulation is especially stimulative during a ZLB recession. - General implication: - The ZLB per se does not make market reform contractionary; because reforms are not inherently deflationary in this model (some are inflationary in the short run), the binding constraint on monetary policy is not the key determinant — prevailing business cycle conditions are. ### Policy-relevant takeaways and caveats - Takeaways: - Evaluations of structural reforms should emphasize prevailing business cycle conditions rather than focusing solely on constraints on monetary policy (ZLB). - Product market deregulation and coordinated (product + labor) reforms can aid recovery when implemented during ZLB episodes because they can be short-run inflationary and thus lower real rates. - Labor-market reforms are heterogeneous: reducing firing costs can be contractionary in the short run; reducing unemployment benefits tends to stimulate job creation and output. - Micro-level modeling of entry, job creation/destruction, and endogenous markups is crucial: reduced-form exogenous markup cuts can misleadingly imply automatic deflationary effects at the ZLB. - Caveats and limitations noted by the authors: - The model does not include potential productivity gains from reduced X-inefficiency among incumbents or increased innovation; this may understate short-term effects of reforms. - Only one regulated non-tradable sector is modeled; entry costs and resource requirements vary by sector in practice (e.g., telecommunications vs taxis). - Welfare incidence: unemployment-benefit cuts may harm lower-income, credit-constrained households; the model abstracts from heterogeneous households and credit constraints. - The model treats unemployment benefits as lump-sum transfers in the representative-household framework; alternative fiscal financing or distributional channels could modify aggregate demand effects. ### Conclusion - Main conclusion reiterated: - While business cycle conditions at the time of deregulation matter for short- to medium-run outcomes, the presence of the ZLB does not by itself induce recessionary effects of market reforms. Some reforms can be more beneficial when the ZLB is binding (e.g., product market reform and joint deregulation), because reforms are not generally deflationary and can be short-run inflationary. - There is no simple across-the-board relationship between market reforms and the behavior of real marginal cost once primitive product and labor market dynamics are modeled. *wp17215 - 5. Productivity Effects of Market Reforms* ### References ### wp17215 - References ### References list (bibliographic coverage) - The content unit includes a numbered references list [1]–[83] citing empirical, theoretical, and policy literature on labor markets, product market regulation, business cycles, DSGE modeling, search-and-matching frameworks, and structural reform effects. Representative topics in the cited literature include: - Labor-market search and matching (e.g., Mortensen and Pissarides; Rogerson, Shimer, and Wright). - Firing costs, unemployment insurance, and wage bargaining (e.g., Bentolila and Bertola; Mitman and Rabinovich). - Product market regulation, entry costs, and firm dynamics (e.g., Djankov et al.; Ebell and Haefke; Bernard, Redding, and Schott). - Monetary policy interactions with structural reforms and the zero lower bound (e.g., Eggertsson; Gerali et al.; Cacciatore et al.). - International trade, heterogeneous firms, and macro dynamics (e.g., Ghironi and Melitz; Feenstra). - The references are labeled [1] through [83] and include working papers, IMF and OECD publications, journal articles, and books. ### Model equations inventory - The document reproduces model equations (H1)–(H27) for the Home economy and notes that equations (F1)–(F27) are the Foreign counterparts. - Selected structural forms and relations presented (notation preserved exactly): - (H1) L_t = (1) (1G(z^c_t)) (L_{t-1}+M_{t-1}) - (H2) \~K_{t+1} = (1_{K;t}) \~K_t + I_{K;t} [1_{K} /2 (I_{K;t}/I_{K;t-1} -1)^2] - (H3) N_{t+1} = (1) (N_t + N^E_t) - (H4) M_t = (1L_t) " _t V^{1"_t} - ... (complete system extends to (H27), including q_t asset-pricing conditions, investment Euler-like equations, and ZLB specification) - Note: Equations (F1)–(F27), omitted in the printed table, are the Foreign counterparts of (H1)–(H27). ### Calibration (Table 2) — parameters preserved exactly - Variety elasticity  = 0:34 - Unemployment beneÖt b = 0:33 - Risk aversion = 1 - Firing costs F = 0:06 - Discount factor = 0:99 - Matching function elasticity " = 0:5 - EOS, home and foreign goods _T = 1:5 - Home bias 1 _T = 0:6 - EOS, tradables and non-tradables _N = 0:5 - Share of non-tradables consumption _N = 0:80 - Share of non-tradables in manufacturing  = 0:6 - Bond adjustment cost = 0:0025 - Technological entry cost f_T = 0:73 - Workers' bargaining power  = 0:5 - Regulation entry cost f_R = 1:09 - Home production h_P = 0:6 - Plant exit  = 0:004 - Matching e¢ ciency  = 0:45 - Investment adjustment costs  = 0:16 - Vacancy cost k = 0:11 - Capital depreciation rate _K = 0:025 - Exogenous separation rate  = 0:036 - Capital share = 0:33 - Lognormal shape _{z_i} = 0:14 - Capital utilization, scale { = 0:035 - Lognormal log-scale _{z_i} = 0 - Consumption habits h_C = 0:6 - Capital utilization, convexity & = 0:41 - Interest Rate Smoothing %  = 0:87 - Ináation Response %  = 1:93 - GDP Gap Response % i = 0:075 - Zero lower bound i_zlb = 0:01 ### Figures and simulation scenarios (summarized) - Figures compare dynamics across scenarios: a baseline recession versus a recession followed by market reforms (product-market reform, firing cost reform, unemployment benefit reform, joint product and labor market reform). - Panels include: - Top panels: recession (continuous lines) versus recession followed by reform (dashed lines). - Bottom panels: net effect of reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Outcomes reported as: - Responses show percentage deviations from the initial steady state; unemployment is reported as deviations from the initial steady state. - Aggregate and sectoral labor-productivity dynamics following market reforms are reported for: - Aggregate labor productivity (lp_t) - Labor productivity in the tradable sector (lp_T_t) - Labor productivity in the non-tradable sector (lp_NT_t) - Additional simulations include a risk-premium shock with high regulation (responses shown as percentage deviations from the steady state; unemployment deviations from the steady state). ### Online Appendix — substantive model and calibration notes - Document metadata: - Title: Online Appendix to "Market Reforms at the Zero Lower Bound" - Authors and affiliations listed: Matteo Cacciatore (HEC MontrÈal and NBER), Romain Duval (International Monetary Fund), Giuseppe Fiori (North Carolina State University), Fabio Ghironi (University of Washington, CEPR, EABCN, and NBER). - Date: August 3, 2017 - Appendix A — Wage determination: - Presents wage-sharing rule and surplus decomposition with bargaining weight  and firing costs F. - Worker surplus W_t(z) and firm surplus F_t(z) equations reproduced; marginal revenue product of capital condition (equation (3)) and average capital per worker expression (equation (4)). - Final average wage expressions preserved exactly: - ~w_t = [~_t + #_t + F_t (1) (1_t) E_t _{t;t+1} F_{t+1}] + (1) (h_p + b_t) - Appendix B — Market regulation: - Notes data split for "core and periphery" euro area countries. - Calibration of red-tape costs follows Ebell and Haefke (2009) updated to 2013 using OECD indicators. - Regression result for 1997 log total entry costs on OECD indicator: coefficient 0:854 with t-stat of 4:87, correlation coefficient 0:78; constant term 1:345. - Procedure: regress 1997, then plug 2013 OECD indicator to obtain updated total entry costs, and compute GDP-weighted euro-area averages. - Appendix C — Data-consistent variables: - Welfare-based price index definitions and variety effect: - Variety effect N_t = exp( (~N N_t^2 / (2 _{~NN_t}) ) ) — notation preserved as in source. - Deáator and average price index ~P_t expressions presented; mapping from variables in units of consumption to data-consistent counterparts shown as: - X_{R;t} = P_t X_t / ~P_t = X_t (1 (1_N) t) [expression preserved exactly as in source formatting] - Appendix D–F — Impulse responses: - Appendix D: Impulse responses for the Foreign economy documented (Figures A.1–A.5); qualitative summary: - Foreign GDP and employment temporarily fall relative to the initial steady state as Foreign households invest in Home; subsequent reductions in red-tape boost consumption and investment, reduce unemployment, increase goods substitutability, and lower markups. - Appendix E: Impulse response for a reduction in Home production (Figure A.6). - Appendix F: Symmetric reforms (Figures A.7–A.10). *Source: wp17215 - References (PDF).* ### References ### wp17215 - References ### References - [1] Djankov, S., R. L. Porta, F. Lopez-De-Silanes, and A. Shleifer (2002): ìThe Regulation Of Entry,î The Quarterly Journal of Economics, 117: 1ñ37. - [2] Koske, I., I. Wanner, R. Bitetti, and O. Barbiero (2014): ìThe 2013 Update of the OECD Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries,î OECD Economics Department Working Papers. - [3] Ebell, M., and C. Haefke (2009): ìProduct Market Deregulation and the U.S. Employment Miracle,î Review of Economic Dynamics 12: 479-504. - [4] Mortensen, D. T., and C. A. Pissarides (2002): ìTaxes, Subsidies and Equilibrium Labor Market Outcomes,î CEP DP 0519. - [5] Pissarides, C. A. (2003): ìCompany Startup Costs and Employment,î in Aghion, P., R. Frydman, J. Stiglitz, and M. Woodford, eds., Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, Princeton University Press, Princeton, NJ, pp. 479-504. ### Table A.1: Regulation in the euro area - CorePeriphery - Product Market Regulation, OECD Regulation Index Retail Industry, 2013: 2.58 2.94 - Unemployment Benefits, Gross Replacement Rate, 2013: 29.4 34.9 - Employment Protection Legislation, OECD Index, 2013: 2.59 2.34 ### Figure A1: Foreign dynamics following Home product market reform - Top panel: recession (continuous lines) versus recession followed by Home product market reform (dashed lines); - Bottom panel: net effect of Home product market reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.2: Foreign dynamics following Home firing cost reform - Top panel: recession (continuous lines) versus recession followed by Home firing cost reform (dashed lines); - Bottom panel: net effect of Home firing cost reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.3: Foreign dynamics following Home unemployment benefit reform - Top panel: recession (continuous lines) versus recession followed by Home unemployment benefit reform (dashed lines); - Bottom panel: net effect of Home unemployment benefit reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.4: Foreign dynamics following Home joint reform in product and labor market - Top panel: recession (continuous lines) versus recession followed by Home joint product and labor market reform (dashed lines); - Bottom panel: net effect of Home joint product and labor market reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.5: Aggregate and sectoral labor-productivity dynamics in Foreign following Home market reforms - Scenarios: normal times (continuous lines), recession with binding ZLB (dashed lines), recession where the interest rate is allowed to violate the ZLB (dotted lines). - First row: aggregate labor productivity (lpt); - Second row: labor productivity in the tradable sector (lpTt); - Third row: labor productivity in the non-tradable sector (lpNTt). ### Figure A.6: Reduction in home production - Top panel: recession (continuous lines) versus recession followed by a reduction in home production (dashed lines); - Bottom panel: net effect of a reduction in home production in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.7: Symmetric product market reform - Top panel: recession (continuous lines) versus recession followed by symmetric product market reform (dashed lines); - Bottom panel: net effect of symmetric product market reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.8: Symmetric firing cost reform - Top panel: recession (continuous lines) versus recession followed by symmetric firing cost reform (dashed lines); - Bottom panel: net effect of firing cost reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.9: Symmetric unemployment benefit reform - Top panel: recession (continuous lines) versus recession followed by symmetric unemployment benefit reform (dashed lines); - Bottom panel: net effect of unemployment benefit reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. ### Figure A.10: Symmetric joint product and labor market reform - Top panel: recession (continuous lines) versus recession followed by symmetric joint product and labor market reform (dashed lines); - Bottom panel: net effect of joint product and labor market reform in normal times (continuous lines), in a recession with binding ZLB (dashed lines), and in a recession where the interest rate is allowed to violate the ZLB (dotted lines). - Responses show percentage deviations from the initial steady state. Unemployment is in deviations from the initial steady state. *Source: wp17215 - References* --- _Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17215.pdf_