Market Reforms in the Time of Imbalance

74 Pages Posted: 4 May 2016

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: April 2016


We study the consequences of product and labor market reforms in a two-country model with endogenous producer entry and labor market frictions. We focus on the role of business cycle conditions and external constraints at the time of reform implementation (or of a credible commitment to it) in shaping the dynamic effects of such policies. Product market reform is modeled as a reduction in entry costs and takes place in a non-traded sector that produces services used as input in manufacturing production. Labor market reform is modeled as a reduction in firing costs and/or unemployment benefits. We find that business cycle conditions at the time of deregulation significantly affect adjustment. A reduction of firing costs entails larger and more persistent adverse short-run effects on employment and output when implemented in a recession. By contrast, a reduction in unemployment benefits boosts employment and output by more in a recession compared to normal times. The impact of product market reforms is less sensitive to business cycle conditions. Credible announcements about future reforms induce sizable short-run dynamics, regardless of whether the announcement takes place in normal times or during an economic downturn. Whether the immediate effect is expansionary or contractionary varies across reforms. Finally, lack of access to international lending in the wake of reform can amplify the costs of adjustment.

Keywords: Business cycle, External borrowing constraint, Labor market, Product market, Structural reforms

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

Suggested Citation

Cacciatore, Matteo and Duval, Romain and Fiori, Giuseppe and Ghironi, Fabio Pietro, Market Reforms in the Time of Imbalance (April 2016). CEPR Discussion Paper No. DP11247, Available at SSRN:

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


Fabio Pietro Ghironi

University of Washington ( email )

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


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