Market Reforms at the Zero Lower Bound

By Matteo Cacciatore, Romain A Duval, Giuseppe Fiori, Fabio Ghironi

October 3, 2017

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Matteo Cacciatore, Romain A Duval, Giuseppe Fiori, and Fabio Ghironi. Market Reforms at the Zero Lower Bound, (USA: International Monetary Fund, 2017) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Commodity markets, Consumption, Expenditure, Financial markets, Financial services, Labor productivity, National accounts, Production, Unemployment benefits, Zero lower bound

Keywords: Commodity markets, Consumption, Employment protection, Global, Labor market dynamics, Labor productivity, Monetary policy, Nominal interest rate, Physical capital, Present discounted value, Producer entry, Product market, Product market deregulation, Product market reform, Product market regulation, Structural reforms, Unemployment benefits, WP, Zero lower bound

Publication Details

Pages:

65
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/215
Stock No:

WPIEA2017215
ISBN:

9781484320679
ISSN:

1018-5941

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