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The impact of selected structural reforms: Adjustment speed and distributional effects

14th DUBROVNIK ECONOMIC CONFERENCE. The impact of selected structural reforms: Adjustment speed and distributional effects Annabelle Mourougane Lukas Vogel OECD Economics Department. Introduction. Good understanding of the long-term effects of structural reforms

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The impact of selected structural reforms: Adjustment speed and distributional effects

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  1. 14th DUBROVNIK ECONOMIC CONFERENCE The impact of selected structural reforms: Adjustment speed and distributional effects Annabelle Mourougane Lukas Vogel OECD Economics Department

  2. Introduction • Good understanding of the long-term effects of structural reforms • Little is known about short-term effects of reforms • Crucial from a political economy point of view

  3. Roadmap • Tools used in the paper • Delays of adjustment • Effects of existing market rigidities on the speed of adjustment • Interactions with monetary policy and international spillovers • Distributional effects of reforms

  4. Tools

  5. A set of complementary tools • Data on institutions provides us insights on ex-post effects of reforms • Models are useful for ex-ante assessments • Macro-economic neo-Keynesian models • DGE model

  6. Delays of adjustment

  7. The equilibrium unemployment rate and the contribution of institutions in the European Union

  8. The impact of structural reforms is gradual Correlation [D(INSTt-i), (NAIRUt –NAIRUt-i)]

  9. Impact of existing market rigidities

  10. Modelling rigidities in the DGE model • Employment and price adjustment costs • Quadratic forms • Employment: • Price:

  11. Hiring and firing and price adjustment costs are found to have a limited effects on the speed… Effect of a 1 percentage point income tax rate cut (Change compared to baseline)

  12. This result holds for a number of reforms Cut in social security contributions Cut in the benefit replacement rate

  13. And is robust to the way the labour market is modelled Search-and-matching model (Change compared to baseline)

  14. Interaction with monetary policy

  15. Monetary policy can speed up the adjustment in the United States… Impact on production of a one percentage point decline in the NAIRU (Change compared to baseline)

  16. … but less so in the euro area… Impact on production of a one percentage point decline in the NAIRU (Change compared to baseline)

  17. … even with an alternative monetary policy reaction Impact of a one percentage point decline in the NAIRU

  18. … and even less so in individual euro area countriesExample of France Impact on production of a one percentage point decline in the NAIRU (Change compared to baseline)

  19. International spillovers are very small Impact of a one percentage point decline in the U.S. NAIRU (Change compared to baseline)

  20. Distributional effects of reforms

  21. Distributional effects of reforms Introduction of two types of households in the DGE model: • Fully optimising households: unlimited access to financial markets, fully optimise their consumption decisions • Liquidity-constrained households: can only consume their disposable income at each period

  22. Potential short-term costs of structural reforms Income tax cut Replacement rate cut Social contribution cut

  23. Effects of a budgetary compensation scheme Cut in the benefit replacement rate (Change compared to baseline)

  24. Concluding remarks • The impact of structural reforms is gradual and takes years to materialise. • Employment and price adjustment costs are found to have a very small impact on adjustment speed. • Monetary policy can fasten significantly the adjustment process but mostly in the United States. • Structural reforms can have different distributional implications.

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