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Euro area structural reforms in times of a global crisis

Sandra Gomes

Journal of Macroeconomics, 2018, vol. 55, issue C, 28-45

Abstract: The global financial crisis and the sovereign debt crisis brought back to the policy debate the issue of the lower bound (LB) on interest rates and the policy options when this is a binding constraint. The paper looks at structural reforms as a way to provide economic stimulus for an economy at the LB. We focus on the euro area and carry out a comprehensive analysis within a multi-country structural model of the euro area within the world. Main results show structural reforms have positive short-run effects that reduce the size of a recession and in some cases can drive the euro area out of the LB. The labor reform accentuates deflation which implies that interest rates remain at the LB for the same number of periods, while the services reform pushes the euro area out of the LB if implemented in the largest part of the union. The latter result hinges on the assumption of a gradual implementation of reforms. Reforms have significantly different effects across different types of households and thus the share of these households is important in the transmission. Unilateral reforms in a large bloc have positive spillover effects within the euro area. Unilateral reforms in a small bloc are deflationary but the small size of the bloc leads to very limited impact of national developments on monetary policy.

Keywords: Lower bound; Structural reforms; Monetary policy; Dynamic general equilibrium models (search for similar items in EconPapers)
JEL-codes: E52 F42 F47 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:55:y:2018:i:c:p:28-45

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