Market Reforms at the Zero Lower Bound

64 Pages Posted: 30 Oct 2017 Last revised: 3 Nov 2017

See all articles by Matteo Cacciatore

Matteo Cacciatore

HEC Montreal

Romain Duval

International Monetary Fund (IMF)

Giuseppe Fiori

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Fabio Pietro Ghironi

University of Washington

Multiple version iconThere are 3 versions of this paper

Date Written: October 2017

Abstract

This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing---such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates.

Suggested Citation

Cacciatore, Matteo and Duval, Romain and Fiori, Giuseppe and Ghironi, Fabio Pietro, Market Reforms at the Zero Lower Bound (October 2017). NBER Working Paper No. w23960, Available at SSRN: https://ssrn.com/abstract=3061641

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

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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