Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies

Matteo Cacciatore, Romain Duval, Giuseppe Fiori and Fabio Ghironi

No 21784, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms—such as reductions in employment protection—increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath—either because of the zero bound on policy rates or because of membership in a monetary union—may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.

JEL-codes: E24 E32 E52 F41 J64 L51 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac, nep-mon and nep-opm
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Matteo Cacciatore & Romain Duval & Giuseppe Fiori & Fabio Ghironi, 2016. "Short-term pain for long-term gain: market deregulation and monetary policy in small open economies," Journal of International Money and Finance, vol ().

Downloads: (external link)
http://www.nber.org/papers/w21784.pdf (application/pdf)

Related works:
Journal Article: Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies (2016)
Working Paper: Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:21784

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w21784

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().