Abstract
This chapter introduces the topic of structural reform, discussing the main potential benefits of reform (such as higher growth, productivity and employment; increased resilience of economies in case of adverse shocks; and a better functioning of the Economic and Monetary Union), different types of reform (notably labour and product market reform), several methodological issues that arise when analysing the effects of reform, like the endogeneity of reforms and the role of the effective lower bound, cyclical conditions and fiscal policy. The chapter ends with a discussion of the redistributional effects of reform and the political economy of reform.
The views expressed in this chapter are those of the authors and should not be attributed to DeNederlandsche Bank.
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Notes
- 1.
Since the early 1990s the rate of growth of productivity in the euro area has been lower than that in the United States (Van Ark 2014).
- 2.
Bayoumi and Eichengreen (1993) show that before the start of the euro area there was a core of countries where shocks were highly synchronized, and a periphery where synchronization was significantly lower. However, in their update of the Bayoumi-Eichengreen study, Campos and Macchiarelli (2016) conclude that the core-periphery pattern has weakened. Likewise, some studies suggest that business cycles have become more synchronized within the euro area due to, inter alia, increasing trade relationships following monetary integration (see de Haan et al. 2008 for a discussion).
- 3.
However, Galí and Monacelli (2016) question the importance of wage flexibility in a monetary union by arguing that lower interest rates via country-specific monetary policy are a key mechanism behind positive growth impacts of lower wage growth (or wage cuts), while such a monetary policy response is not possible for individual countries in a monetary union.
- 4.
Financial liberalization may also spur financial development. Although there is substantive evidence that financial development may enhance growth, recent research suggests a non-linear relationship between financial development and economic growth for several reasons. At high levels of financial development, the further deepening of financial markets may be associated with financial services that have a lower growth potential, such as mortgage finance. Financial development may also be associated with a higher frequency of financial crises. Furthermore, the financial sector may attract human capital away from the real economy. Finally, financial development may lead to more income inequality.
- 5.
This could be especially effective in a currency union. Farhi et al. (2014) demonstrate how such changes in taxes can act as a devaluation.
- 6.
This implies that the authors ignore the effectiveness of unconventional monetary policy instruments in alleviating the effective lower bound.
- 7.
The response of investments to credible structural reforms is also key in Gerali et al. (2015) who examine the effects of reform of the service sector in a small economy within a monetary union. They find that even in the context of the ELB such a reform increases GDP over the short-to-medium run and this effect critically hinges upon the response of investments. Likewise, Gomes (2014) finds that permanent structural reforms can help to alleviate the impact of the recession driving nominal interest rates towards the ELB, but reform coordination across member countries is necessary to reduce the time spent at the ELB.
- 8.
Furthermore, the business cycle may not only affect the likelihood of a reform or shape the reform’s impact on macroeconomic outcomes, but also prompt a macroeconomic policy response which could affect the estimated impact of the reform (see below).
- 9.
The redistributional consequences of structural reform have received limited attention in the literature. A clear exception is the impact of financial liberalization, which has been extensively researched; the results of the various studies are very mixed as de Haan and Sturm (2017) show in their review of the literature.
- 10.
Also several other political-economy factors have been researched in the literature. For instance, Da Silva et al. (2017) examine for a sample of 40 OECD countries the driving forces of four main areas of reform: labour market, product market, framework conditions and FDI restrictions, taking some political-economy factors into account. Their results suggest that having one party with majority in all houses increases the likelihood of reform implementation, while the proximity to national elections or the political orientation of the government does not appear to influence reform implementation. See de Haan et al. (2006) for a discussion of older studies.
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de Haan, J., Parlevliet, J. (2018). Structural Reforms: An Introduction. In: de Haan, J., Parlevliet, J. (eds) Structural Reforms. Springer, Cham. https://doi.org/10.1007/978-3-319-74400-1_1
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