NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies

Matteo Cacciatore, Romain Duval, Giuseppe Fiori, Fabio Ghironi

NBER Working Paper No. 21784
Issued in December 2015
NBER Program(s):   EFG   IFM   ME

This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms—such as reductions in employment protection—increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath—either because of the zero bound on policy rates or because of membership in a monetary union—may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.

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Document Object Identifier (DOI): 10.3386/w21784

Published: Matteo Cacciatore & Romain Duval & Giuseppe Fiori & Fabio Ghironi, 2016. "Short-term pain for long-term gain: market deregulation and monetary policy in small open economies," Journal of International Money and Finance, vol (). citation courtesy of

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