Structural Reforms, Investment and Zero Lower Bound in a Monetary Union

20 Pages Posted: 27 Aug 2015

Date Written: September 2015

Abstract

We assess the effects of competition‐friendly reforms on the zero lower bound (ZLB) on the monetary policy rate in a monetary union, using a dynamic general equilibrium model calibrated to two regions within the euro area (EA) and the rest of the world. Reforms simultaneously implemented in the entire EA favor an earlier exit from the ZLB if they generate sufficient short‐run inflationary effects. This happens if capital accumulation increases, magnifying the expansionary effects of reforms on permanent income and, thus, short‐run aggregate demand. If investment does not increase, the effects are not sufficient to reduce the ZLB duration.

Suggested Citation

Gerali, Andrea and Notarpietro, Alessandro and Pisani, Massimiliano, Structural Reforms, Investment and Zero Lower Bound in a Monetary Union (September 2015). The Manchester School, Vol. 83, pp. 120-139, 2015. Available at SSRN: https://ssrn.com/abstract=2650892 or http://dx.doi.org/10.1111/manc.12120

Andrea Gerali (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

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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