Gerali, Notarpietro & Pisani: Macroeconomic effects of simultaneous implementation of reforms after the crisis

ABSTRACT:

This paper evaluates the macroeconomic effects of simultaneously implementing fiscal consolidation and competition-friendly reforms in a country of the euro area by simulating a large-scale dynamic general equilibrium model. We find, first, that the joint implementation of reforms has additional expansionary effects on long-run economic activity. Increasing competition in the service sector favors a higher income tax base. Given the targeted public debt-to-GDP ratio, labor and capital income tax rates can be reduced more than with fiscal consolidation alone. Second, fiscal consolidation has non-negligible medium-run costs; however, they are reduced by joint implementation with the services reform. The results are robust to alternative assumptions that capture the impact of financial crisis on the financing conditions of households.

 

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