5 Concluding remarks
This paper analyses the impact of implementing structural reforms when an economy that is in a deep recession that led interest rates to the lower bound. We focus on the euro area. While the long-run impact of an increase in competition in the labour and services markets is positive, the short term impact depends on a number of characteristics of an economy, including the response of monetary policy. We use a large scale fully structural model of the euro area because: (i) by being multi-sectoral it allows for investigating reforms in the services market and in the labour market; (ii) by being multi-country, in particular by formalizing the euro area as a two-bloc monetary union it allows us to analyse the issue of coordination and spillovers of reforms within the euro area; (iii) by including different types of agents it allows to explore the importance of having financially constrained agents for the reforms impact.
We find that structural reforms are short run positive impact, that the reforms have differentiated impact across different types of households, that unilateral reforms in a large bloc have positive spillover effects within the euro area, and that an increase in the share of constrained households reduces the short run macroeconomic benefits of reforms. A reform in the small bloc euro area bloc has very different results for inflation that in this case falls, as the large fall in nontradable inflation is not offset by changes in inflation of tradable goods. However given the very small size its impact on euro area monetary policy is negligible, thus enacting the reforms at the lower bound is no longer relevant.
