Structural Reforms and Zero Lower Bound in a Monetary Union

46 Pages Posted: 24 Apr 2015

Date Written: January 23, 2015

Abstract

We assess the short- and medium-term macroeconomic effects of competition-friendly reforms in the service sector when the monetary policy rate is stuck at the zero lower bound (ZLB) in a monetary union. We calibrate a large-scale multi-country multi-sector dynamic general equilibrium model to one region within the euro area, the rest of the euro area and the rest of the world. We find first, that unilateral reforms by a single country do not affect the number of periods for which the ZLB holds and have mild medium-term expansionary effects on GDP. Second, reforms simultaneously implemented in the entire euro area can favor an earlier exit from the ZLB if they have sufficiently inflationary effects, which happens when the gradual increase in the supply of goods and services is matched by a sufficiently large increase in investment, associated with higher expected levels of output. Reforms have expansionary effects because of their positive wealth effect, which more than counterbalances the recessionary substitution effect associated with higher real interest rates. If investment cannot immediately react to the reforms, then the latter has a deflationary impact and the duration of the ZLB is not reduced.

Keywords: competition, markups, monetary policy, zero lower bound

JEL Classification: C51, E31, E52

Suggested Citation

Gerali, Andrea and Notarpietro, Alessandro and Pisani, Massimiliano, Structural Reforms and Zero Lower Bound in a Monetary Union (January 23, 2015). Bank of Italy Temi di Discussione (Working Paper) No. 1002. Available at SSRN: https://ssrn.com/abstract=2598068 or http://dx.doi.org/10.2139/ssrn.2598068

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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