Market Reforms at the Zero Lower Bound

Matteo Cacciatore, Romain Duval, Giuseppe Fiori and Fabio Ghironi

No 23960, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that 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. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates.

JEL-codes: E24 E32 E52 F41 J64 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-lab, nep-mac and nep-opm
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Matteo Cacciatore & Romain Duval & Giuseppe Fiori & Fabio Ghironi, 2017. "Market Reforms at the Zero Lower Bound," IMF Working Papers, vol 17(215).
Published as Matteo Cacciatore & Romain Duval & Giuseppe Fiori & Fabio Ghironi, 2021. "Market Reforms at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 745-777, June.

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Working Paper: Market Reforms at the Zero Lower Bound (2017)
Working Paper: Market Reforms at the Zero Lower Bound (2017)
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