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

54 Pages Posted: 13 Apr 2011

See all articles by Sandra Gomes

Sandra Gomes

Bank of Portugal

Pascal Jacquinot

European Central Bank (ECB)

Matthias F. Mohr

European Central Bank (ECB)

Massimiliano Pisani

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2011

Abstract

We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.

Keywords: Economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups, monetary policy

JEL Classification: C53, E52, F47

Suggested Citation

Gomes, Sandra and Jacquinot, Pascal and Mohr, Matthias F. and Pisani, Massimiliano, Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model-Based Assessment (March 28, 2011). ECB Working Paper No. 1323, Available at SSRN: https://ssrn.com/abstract=1797563

Sandra Gomes (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Pascal Jacquinot

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matthias F. Mohr

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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