Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model‐<scp>B</scp>ased Assessment

Gomes, Sandra; Jacquinot, Pascal; Mohr, Matthias; Pisani, Massimiliano

doi:10.1111/j.1468-2362.2013.12025.x

Cited by 180 publications

(32 citation statements)

References 23 publications

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“…18 (Gross) real exports increase by 2 percent after two years, while gross imports marginally decrease. Net exports increase towards all destinations (rest of the euro area, US and rest of the world).…”

Section: Fiscal Devaluation In Spainmentioning

confidence: 99%

Fiscal devaluation in the euro area: A model-based analysis

2016

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In 2014 all ECB publications feature a motif taken from the €20 banknote.NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB. Sandra GomesBank of Portugal; e-mail: sandra.cristina.gomes@bportugal.pt Pascal JacquinotEuropean Central Bank; e-mail: pascal.jacquinot@ecb.int Massimiliano PisaniBank of Italy; e-mail: massimiliano.pisani@bancaditalia.it AbstractWe assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables. JEL Classification Numbers: F32; F47; H20.Keywords: fiscal devaluation; trade deficit; dynamic general equilibrium modeling. ECB Working Paper 1725, August 2014 1Non-technical Summary A country belonging to a monetary union cannot rely on nominal exchange rate devaluation to increase, in presence of nominal price rigidities, its international relative price competitiveness and, hence, improve in the short run its trade balance. An alternative way to increase the short-run international price competitiveness is through a temporary "fiscal devaluation", defined as the combination of two fiscal measures: the decrease in social contributions paid by employers and the increase in consumption tax.The reduction in employers' social contributions reduces the unit labor costs. As long as the latter are passed-through into final prices, the improvement in price competitiveness favors exports and reduces imports. The reduction in contributions is financed by increasing the consumption tax, which is also a destination-based tax. As such, it raises the after-tax price of domestic and imported goods uniformly, but not the price of exported goods. Overall, the combination of lower unit labor costs and higher consumption tax decreases the price of exported goods and increases the after-tax relative price of the imported good.In this paper we assess the trade balance improvement in correspondence of a tem- lower than in the case on unilateral devaluation, as tradable goods produced in the rest of the euro area are now more competitive than in the case of unilateral devaluation. Ex-

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Section: Fiscal Devaluation In Spainmentioning

confidence: 99%

Fiscal devaluation in the euro area: A model-based analysis

2016

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“…Bayoumi, Laxton, and Pesenti (2004), Everaert and Schule (2008) and Gomes, Jacquinot, Mohr, and Pisani (2011) approximate the rigidity of labour market institutions by a mark-up parameter that drives a wedge between marginal costs of labour and real wages. While those analyses are illuminating, they do not deal with institutional parameters that policy-makers can address directly and abstract from labour market frictions inducing involuntary unemployment.…”

Section: Related Literaturementioning

confidence: 99%

The German Labour Market Reforms in a European Context: A DSGE Analysis

Busl

Seymen

2013

SSRN Journal

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract While a widespread consensus exists among macroeconomists that the German labour market reforms in [2003][2004][2005] have successfully contributed to the decline of the unemployment rate, critics claim that the reforms led to wage restraint and consequently consumption dampening accompanied by beggar-thy-neighbour effects, harming Germany's trade partners. We check up on the validity of these arguments by means of a two-country DSGE model featuring intra-industry trade and labour market frictions. Our results suggest that the disproportional growth of GDP (labour productivity) in comparison to consumption (wages) are only partially driven by the reforms. However, we do not find that the reforms contribute to Germany's trade surplus and cause negative spillovers to trading partners in terms of output and employment. The German Labour Market Reforms in a EuropeanJEL classification: E24, E61, E65, F42, J38, J63

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“…changes in imports dampen the aggregate demand impact of any reform-driven change in domestic demand, thereby helping stabilise the economy; ii) openness can also magnify the net external demand gains from reforms that reduce domestic prices and improve external competitiveness, helping crowd in demand more in smaller, more open economies; iii) at the same time, insofar as the real exchange rate depreciates and triggers a terms of trade loss, the associated negative effects on households' consumption may be larger in more open economies, where imports have a larger weight in domestic demand (Gomes et al, 2011).…”

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confidence: 99%

“…Another related argument in favour of cross-country coordination is that it limits the deterioration of relative prices and purchasing power that a country faces when implementing the reforms unilaterally, especially for a small open economy (see e.g. Gomes et al, 2011).…”

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confidence: 99%

The Short-Term Effects of Structural Reforms

Bouis

Causa

Demmou

et al. 2012

OECD Economics Department Working Papers

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JT03318630Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Drawing on new empirical analysis of 30 years of structural reforms across the OECD, this paper sheds light on the impact of reforms over time, identifies the horizon over which their full effects materialise, and investigates whether such effects vary with prevailing economic conditions and institutions. Impulse responses of aggregate outcomes (GDP growth, employment rate) to various labour, product market and tax reforms are estimated at different horizons. This analysis indicates that the benefits from reforms typically take time to fully materialise. When significant effects are found in the short run, reforms seldom involve significant aggregate economic losses; on the contrary they often deliver some benefits. The absence of major depressing effects does not lend support to the view that reforms should be in general accompanied by substantial macroeconomic policy easing in order to deliver some short-term gains. Nevertheless, there is also tentative evidence that some labour market reforms (e.g. of unemployment benefit systems and job protection) pay off more quickly in good times than in bad times, and can even entail short-term losses in severely depressed economies.JEL classification: E02; E21; E22; E24; E60; J21; J23; J38; J58; J68.Key words: Institutions; reforms; labour market; product market; tax system; macroeconomic conditions; impulse response function. ********************************* L'impact à court terme des réformes structurelles : une analyse empiriqueCet article s'appuie sur des données portant sur trente années de reformes structurelles dans les pays de l'OCDE et analyse l'impact de ces reformes au cours du temps. Nous cherchons plus particulièrement à identifier l'horizon temporel à partir duquel ces effets se matérialisent ainsi qu'à déterminer la façon dont le positionnement dans le cycle économique ou les arrangements institutionnels en vigueur dans chaque pays affectent les résultats. L'analyse empirique repose sur l'estimation, à différents horizons temporels, de taux de réponse des variables de performances (taux de croissance du PIB, taux d'emploi) à des reformes mises en oeuvre dans le domaine fiscal, sur le marché du travail ainsi que sur le marché des produits. D'après nos résultats, les effets des reformes mettent généralement du temps à se matérialiser. Lorsque des effets significatifs sont obtenus dès le court terme, l'analyse indique que les réformes ne génèrent que très rarement des coûts macroéconomiques alors qu'un certain nombre d'entre elles produisent rapidement des bénéfices. L'absence d'effet récessif majeur semble donc infirmer l'idée selon laquelle les reformes devraient généralement être accompagnées de politiques macroéconomiques accommodantes permettant de compenser les...

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Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model‐Based Assessment

Cited by 180 publications

References 23 publications

Fiscal devaluation in the euro area: A model-based analysis

Fiscal devaluation in the euro area: A model-based analysis

The German Labour Market Reforms in a European Context: A DSGE Analysis

The Short-Term Effects of Structural Reforms

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