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

34 Pages Posted: 16 Dec 2015

See all articles by Matteo Cacciatore

Matteo Cacciatore

HEC Montreal

Romain Duval

International Monetary Fund (IMF)

Giuseppe Fiori

Boston College

Fabio Pietro Ghironi

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

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

JEL Classification: E24, E32, E52, F41, J64, L51

Suggested Citation

Cacciatore, Matteo and Duval, Romain and Fiori, Giuseppe and Ghironi, Fabio Pietro, Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies (December 2015). CEPR Discussion Paper No. DP10982, Available at SSRN: https://ssrn.com/abstract=2704476

Matteo Cacciatore (Contact Author)

HEC Montreal ( email )

No Address Available

Romain Duval

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Giuseppe Fiori

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

HOME PAGE: http://fmwww.bc.edu/fmrc/contact/show_book.php?firstname=Giuseppe&lastname=Fiori&catid=2

Fabio Pietro Ghironi

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)

HOME PAGE: http://faculty.washington.edu/ghiro

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