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Are Supply-side Reforms Contractionary at the Zero Lower Bound?

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  • Yangyang Ji

Abstract

Research suggests that if supply-side reforms take place as the nominal interest rate hits the so-called ‘zero lower bound’ (ZLB), the benefits of reforms are outweighed by the negatives, and the net effect is contractionary (Eggertsson et al. 2014; Fernandez-Villaverde 2014). In this article, we show that the effectiveness of temporary reforms that reduce price markups is determined by the interaction between two offsetting effects on the real interest rate: one deflationary and one inflationary. If the latter outweighs the former, the reforms can become expansionary. The effectiveness of permanent reforms is determined by the monetary policy outside the ZLB: a wealth effect. If the effect is large enough, the reforms can also become expansionary (JEL codes: E30, E50, E60).

Suggested Citation

  • Yangyang Ji, 2019. "Are Supply-side Reforms Contractionary at the Zero Lower Bound?," CESifo Economic Studies, CESifo Group, vol. 65(1), pages 68-83.
  • Handle: RePEc:oup:cesifo:v:65:y:2019:i:1:p:68-83.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ify021
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    More about this item

    Keywords

    supply-side reforms; zero lower bound; price markup; wage markup;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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