Trade Policy and Structural Reforms at the Zero Lower Bound: Lessons Learned and Suggestions for Europe

Alessandro Barattieri, Matteo Cacciatore and Francesco Costamagna

No 53, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap - i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise short- and long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process.

JEL-codes: E20 F10 F40 L60 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-07
New Economics Papers: this item is included in nep-eec, nep-int, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:053

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