Transcript 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.