Macroeconomic Effects of Simultaneous Implementation of Reforms after the Crisis
65 Pages Posted: 28 Feb 2015
Date Written: November 21, 2014
This paper evaluates the macroeconomic effects of simultaneously implementing fiscal consolidation and competition-friendly reforms in a country of the euro area by simulating a large-scale dynamic general equilibrium model. We find, first, that the joint implementation of reforms has additional expansionary effects on long-run economic activity. Increasing competition in the service sector favors a higher income tax base. Given the targeted public debt-to-GDP ratio, labor and capital income tax rates can be reduced more than with fiscal consolidation alone. Second, fiscal consolidation has non-negligible medium-run costs; however, they are reduced by joint implementation with the services reform. The results are robust to alternative assumptions that capture the impact of financial crisis on the financing conditions of households.
Keywords: competition, fiscal policy, markups, monetary policy, public debt, spread
JEL Classification: C51, E30, E63
Suggested Citation: Suggested Citation