Structural Reforms at the Zero Bound

The paper uses the a 2-sector multi-region (reforming euro-area region, rest of euro area, rest of world) of the QUEST macroeconomic model to analyse the impact of structural reforms on economic activity in a macroeconomic environment in which the zero bound on monetary policy rates is temporarily binding. The model simulations focus on structural policies with deflationary impact, namely reforms that increase competition and reduce mark-ups and labour costs in the economy. The simulations suggest that the short-term output response to reforms can indeed be negative. Such negative effects are, however, small and rather short-lived in the model incorporating a variety of transmission channels. Simulations that compare current and preannounced future reforms do, furthermore, not support the idea that postponing structural reforms improves economic conditions at the zero bound. Judged by the impact on economic activity, pre-commitment to future reforms performs worse than frontloaded implementation