Monday, March 6th 2017 – 13:00 – 14:00
Maison des Sciences Économiques, Room 19
Maison des Sciences Économiques, 106-112 bd de l’Hôpital, 75013 Paris, Métro 5 Campo Formio, bus 57, 67, 27, 83 ou 47
with C. POILLY (Université Aix-Marseille)
Abstract – Echoing recent developments within the Euro area, the paper investigates the role of price-and market-driven policies in enhancing international competitiveness. We investigate the effects of two reforms, a product market deregulation and a fiscal reform that reduces the labor payroll tax rate, on international relative prices and external imbalances. Importantly, we show that the endogenous PTM behavior of firms affects the effectiveness of both reforms on trade competitiveness, with an effect playing in opposite directions. In a long-run perspective, endogenous markups thus reduce the exchange rate depreciation induced by the fiscal reform, whereas amplifying the effectiveness of product market deregulation. Taking into account the transitional dynamics of the reforms substantially modifies the picture though. The labor tax reform proves to be more effective in improving the current account and depreciating the real exchange rate in the aftermath of the reform, even under endogenous markups. This result generalizes to other macroeconomic variables, such as GDP, hours worked and consumption.