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Market Reforms at the Zero Lower Bound
Author(s) -
CACCIATORE MATTEO,
DUVAL ROMAIN,
FIORI GIUSEPPE,
GHIRONI FABIO
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12773
Subject(s) - zero lower bound , economics , deflation , constraint (computer aided design) , recession , monetary economics , product market , monetary policy , wage , nominal interest rate , macroeconomics , keynesian economics , labour economics , microeconomics , incentive , real interest rate , mechanical engineering , engineering
This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing—such as the zero lower bound (ZLB). To this end, we build a model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the ZLB itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the ZLB is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced‐form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across‐the‐board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates.