## Market Reforms at the Zero Lower Bound

_IMF Working Papers, October 3, 2017_

## Source details

**Canonical URL:** [Market Reforms at the Zero Lower Bound](https://www.imf.org/en/publications/wp/issues/2017/10/03/market-reforms-at-the-zero-lower-bound-45219)

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- [Markdown version](/en/publications/wp/issues/2017/10/03/market-reforms-at-the-zero-lower-bound-45219/index.md)
- [Structured JSON version](/en/publications/wp/issues/2017/10/03/market-reforms-at-the-zero-lower-bound-45219/index.json)
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## Bibliographic details
- Authors: Matteo Cacciatore, Romain A Duval, Giuseppe Fiori, Fabio Ghironi
- Published: October 3, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484320679.001

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### 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.
- The authors build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities.
- Core conclusion: 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. When carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding.
- Mechanism identified: reforms are inflationary in the structural model (or they have no noticeable deflationary effects), which alters the expected interaction between reforms and real marginal costs compared with reduced-form models that treat reforms as exogenous reductions in price and wage markups.

### Model and methods
- Framework: two-country general equilibrium model with
  - endogenous producer entry,
  - labor market frictions,
  - nominal rigidities.
- Comparative approach: analysis of reforms implemented under different cyclical conditions, including recessions with a binding zero lower bound on nominal interest rates.

### Key findings
- The zero lower bound (ZLB) itself does not materially change the direction of reform effects; instead, cyclical conditions determine outcomes.
- Reforms implemented in recessions typically have a stronger impact when the ZLB is binding.
- Reforms are inflationary in the structural model, or have no noticeable deflationary effects.
- There is no simple across-the-board relationship between market reforms and the behavior of real marginal costs, which contrasts with implications from reduced-form treatments that model reforms as exogenous reductions in price and wage markups.
- This divergence significantly alters the consequences of the zero (or any effective) lower bound on policy rates.

### Policy implications and interpretation
- Assessing the macroeconomic effects of product and labor market reforms requires structural analysis that allows for endogenous responses (entry, wages, prices) rather than relying on reduced-form markup reductions.
- The inflationary tendency of reforms in the structural model suggests that the interaction with monetary policy constraints (like the ZLB) may amplify reform impacts during recessions.
- Policymakers should consider cyclical conditions when sequencing or timing market reforms, as benefits may be magnified when monetary policy is constrained and the ZLB is binding.

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## Content in this bundle

- **Market Reforms at the Zero Lower Bound, WP/17/215, October 2017**
  - [Market Reforms at the Zero Lower Bound, WP/17/215, October 2017 (Markdown version)](/-/media/files/publications/wp/2017/wp17215.pdf.md){rel="alternate" type="text/markdown"}
  - [Market Reforms at the Zero Lower Bound, WP/17/215, October 2017 (PDF)](/-/media/files/publications/wp/2017/wp17215.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2017/10/03/market-reforms-at-the-zero-lower-bound-45219_