Download Rome June 4

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
• Little is known about short-term effects of
reforms
• Crucial from a political economy point of
view
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
Tools
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
Delays of adjustment
The equilibrium unemployment rate and the
contribution of institutions in the European Union
Equilibrium unemployment
per cent
Replacement rate
percentage point
10
5
9
4
8
3
7
2
6
1
0
5
1995
1996
1997
1998
1999
2000
2001
2002
Tax wedge
percentage point
1995
2003
1996
percentage point
10
5
9
4
8
3
7
2
6
1
5
1997
1998
1999
2000
2001
2002
2003
2002
2003
Product market regulation
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
Note: The sample includes the 20 countries examined in Bassainini and Duval (2006) except Germany, Finland and Sweden.
The impact of structural reforms is gradual
Correlation [D(INSTt-i), (NAIRUt –NAIRUt-i)]
Average replacement ratio
Tax wedge
0.15
0.15
0.1
0.1
0.05
0.05
0
0
years
-0.05
-0.1
years
-0.05
lag 10
lag 9
lag 8
lag 7
lag 6
lag 5
lag 4
lag 3
lag 2
lag 1
lag 10
lag 9
lag 8
lag 7
lag 6
lag 5
lag 4
lag 3
lag 2
lag 1
-0.1
Product market regulation
EPL
0.15
0.15
0.1
0.1
0.05
0.05
0
0
years
-0.05
years
-0.05
lag 10
lag 9
lag 8
lag 7
lag 6
lag 5
lag 4
lag 3
lag 2
lag 10
lag 9
lag 8
lag 7
lag 6
lag 5
lag 4
lag 3
lag 2
lag 1
lag 1
-0.1
-0.1
Impact of existing market rigidities
Modelling rigidities in the DGE model
• Employment and price adjustment costs
• Quadratic forms
 Employment:
 Price:
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)
This result holds for a number of reforms
Cut in social security
contributions
Cut in the benefit
replacement rate
And is robust to the way the labour market is
modelled
Search-and-matching model
(Change compared to baseline)
Interaction with monetary policy
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)
United States
%
1.0
0.8
0.6
0.4
0.2
0.0
quarters
-0.2
0
10
20
30
40
50
60
without monetary policy reaction
with monetary policy reaction
70
80
… but less so in the euro area…
Impact on production of a one percentage point decline in the NAIRU
(Change compared to baseline)
Euro area
%
0.8
0.6
0.4
0.2
0
-0.2
quarters
0
10
20
30
40
50
60
without monetary policy reaction
with monetary policy reaction
70
80
… even with an alternative monetary policy reaction
Impact of a one percentage point decline in the NAIRU
Euro area real GDP
(difference from baseline)
%
1.2
1
0.8
0.6
0.4
0.2
quarters
0
0
10
20
30
40
50
60
70
80
Taylor rule (0.5, 0.5)
Inflation targeting
Taylor rule (0.2, 0.8)
US real GDP with Taylor rule (0.5, 0.5)
… and even less so in individual euro area countries
Example of France
Impact on production of a one percentage point decline in the NAIRU
(Change compared to baseline)
France
%
1
0.8
0.6
0.4
0.2
0
quarters
0
10
20
30
40
50
60
without monetary policy reaction
with monetary policy reaction
70
80
International spillovers are very small
Impact of a one percentage point decline in the U.S. NAIRU
(Change compared to baseline)
Real GDP
%
0.8
0.6
0.4
0.2
0
quarters
-0.2
0
10
20
30
United States
40
50
60
70
Euro area
80
Distributional effects of reforms
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
Potential short-term costs of structural reforms
Income tax cut
Replacement rate cut
Social contribution cut
Effects of a budgetary compensation scheme
Cut in the benefit replacement rate
(Change compared to baseline)
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.