1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Short-Term Distributional Effects of Structural Reforms

Selected Simulations in a DGSE Framework

This paper examines the short-term distributional effects of a number of tax and labour market reforms in the euro area, drawing on simulations using a micro-founded dynamic general equilibrium model. A heterogeneous household sector with two groups of consumers is considered. The first group maximises intertemporal utility over an infinite horizon in the presence of habit persistence. The second group is liquidity constrained and has no access to financial markets for intertemporal income transfers. It thus spends its disposable income entirely on current consumption. Although the examined reforms are estimated to boost aggregate consumption and output immediately after implementation, they have sizeable distributional effects. In particular, liquidity-constrained households may incur transitional losses after a cut in the benefit replacement ratio. Lowering employment and/or price adjustment costs could markedly reduce these short-term costs. A suitable compensation scheme could also reduce the uneven distribution of transitional losses, but at the expense of lower aggregate gains in the long run.

English

Keywords: DSGE model, structural reforms, distribution, trade transaction costs
JEL: D3: Microeconomics / Distribution; C5: Mathematical and Quantitative Methods / Econometric Modeling; E00: Macroeconomics and Monetary Economics / General / Macroeconomics and Monetary Economics: General
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error