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

Fabio Ghironi, Romain Duval, Giuseppe Fiori and Matteo Cacciatore

No 10982, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Employment protection; Firm entry; Product market regulation; Structural reforms; Unemployment benefits (search for similar items in EconPapers)
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
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Citations: View citations in EconPapers (9)

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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)
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