Analyzing Structural Reforms Using a Behavioral Macroeconomic Model

37 Pages Posted: 12 Jul 2017

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Yuemei Ji

University College London - School of Slavonic and East European Studies

Date Written: June 14, 2017

Abstract

We use a behavioral macroeconomic model to analyze how structural reforms affect the economy in the short and in the long run. We consider two types of structural reforms. The first one increases the flexibility of wages and prices; the second one raises potential output in the economy. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. In addition, a structural reform program that raises potential output has a stronger long-term effect on output and tends to reduce the price level more in a flexible than in a rigid economy. Finally, we analyze how structural reforms change the tradeoffs between output and inflation variability. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms).

Keywords: Animal Spirits, Structural Reforms, Monetary Policy

JEL Classification: E000

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Ji, Yuemei, Analyzing Structural Reforms Using a Behavioral Macroeconomic Model (June 14, 2017). CESifo Working Paper Series No. 6518, Available at SSRN: https://ssrn.com/abstract=2999719 or http://dx.doi.org/10.2139/ssrn.2999719

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuemei Ji

University College London - School of Slavonic and East European Studies ( email )

Malet Street
London WC1E 7HU
United Kingdom

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