Who Dares, Wins: Labor Market Reforms and Sovereign Yields

Christian Ebeke

No 2017/141, IMF Working Papers from International Monetary Fund

Abstract: The paper shows that investors value the adoption of structural reforms by lending at lower cost. The reform-induced reduction of long-term yields is bigger when reforms are initiated in good times and in countries facing high borrowing costs. Importantly, there is no statistical evidence that markets systematically punish countries that launch reforms concomitantly with fiscal stimulus. The paper also finds that the social context matters: structural reforms lead to a short-lived overshooting of yields when followed by strikes or lockouts. Controlling for endogeneity issues does not reject the central finding of the paper. These results are economically plausible and confirmed even after using sovereign credit ratings as an alternative dependent variable. These results have two main implications: (i) on average, labor market reforms lower borrowing costs; and (ii) country-specific circumstances also play a role.

Keywords: WP; yield; long-term yield; Long-term bond yields; Structural reforms; Institutions; yield country; country outlook; dependent variable; control group; reforming country; Output gap; Employment protection; Bond yields; Banking crises; Global (search for similar items in EconPapers)
Pages: 33
Date: 2017-06-28
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