Comments on Mourougane and Vogel'sThe Impact of Selected Structural Reforms:

Speed of Adjustment and Distributional Effects

Maroje Lang, CNB

Reform delay and fatigue

Consensus about positive (long-term) effects of structural reforms

However, structural reforms often delayed or stopped

Why ?

Motivation (authors try to answer the following):

1. why reforms are delayed: adjustment path is important for political economy reasons (short term costs vs. long-term benefits)

2. why reforms work in some countries: how institutions(rigidities in labor and product markets and characteristics

of

financial markets (including monetary policy)) affect the pace of

adjustment to selected reforms 3. how to deal with opposition to reform: analyse

the distributional effects and offer solutions

Methods used

1. descriptive analysis - illustrate the actual data on impact of reforms

2. simulations using two types of models: small macroeconomic neo-Keynesian model and micro founded DSGE model

to illustrate problem and show robustness

the right approach for the OECD study/working paper some methods are self-contained – can be presented

separately

4. DGE model

main and most interesting/promising part of the paper

closed economy with a number of frictions

analyses the adjustment path of change in selected variables – proxies for structural reforms... under different institutional settings+ distribution between agents

Policy simulations

Model with frictions

Reform proxies

Subject to Conclusion

income taxemployer social security contributionsreplacement rateconsumption taxemployment adjustment cost (+search&matching)price adjustment costfinancial market imperfections

income tax

employer social security contributions

replacement rate

↓

fiscal adjustment

different employment and price adjustment costs (EU and US)

Employment adjustment costs have a MODERATE impact on real adjustment ... while price adjustment costs affect nominals

financial market imperfections (liquidity constrained consumers)

Financial frictions have STRONG real effects

analysis of distributional effects and compensation schemes

Some reforms can entail short-term distributional costs... but budgetary schemes can reduce them

monetary policyfiscal rule

Extensions/refinements

model structural reforms which reduce employment and price adjustment costs

conduct alternative monetary policy experiments using DGE model (instead of NK, perhaps different results)

sensitivity analysis? model solution procedure? possible problem with derivation of the pricing

equation (Phillips curve) if so, does it change the results?

Typos ?

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3. Small Neo-Keynesian model

Model difficult to understand model not shown; only some estimated equations

some variables not named and relationships not described ω*; p (producer prices?) vs pcore (consumer prices); what is

(w - p)?; typos

Estimation using general to specific approach (+ moving average terms) makes understanding the model even more difficult

additional equations defining moving averages?

Small Neo-Keynesian model (cont.)

Derived conclusions thus difficult to evaluate1. no international spillovers - international linkages not

presented

2. monetary policy can speed up the adjustment path ??? additional reason against joining the currency union? cause for common EU reforms vs individual country reforms especially interesting as also concluded that employment and price

frictions have no strong effect is it due to the difference in models used? (NK vs DGE)

2. Descriptive analysis II Correlation between the change in

institutions and cumulative change in NAIRU

Strong conclusion : very gradual impact of reforms (5-10yrs) But: weak statistics (rule of thumb 0,1 correlation, no Granger

causality) + macromodels suggest different time of impact - which one to

use? DSGE 3-4years; NK 20+ years

lag

0 ?

lag

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1. Descriptive analysis I

1. Contribution of frictions to structural unemployment (for OECD)

Use results from Bassanini and Duval (2006) to1. Define structural unemployment:

structural unemployment drops in late 1990's

2. Define contributions from reforms: contribution = constant * variable

rather show variables (if must) (+correlations)

Problem with aggregated countries data : (different directions of reforms) tax wedge seems the most important

More interesting is looking into individual countries (US)

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ACTUAL US UNEMPLOYMENT

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without tax cut?

US: the case for Bush tax cuts