Discussion Paper Details

Please find the details for DP12336 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model

Author(s): Paul De Grauwe and Yuemei Ji

Publication Date: September 2017

Keyword(s): behavioural macroeconomics and Structural reforms

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We use a New Keynesian behavioral macroeconomic model to analyze how structural reforms affect the nature of the business cycle and the capacity of the central bank to stabilize output and inflation. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms). We also find that in a rigid economy the central bank in general faces a tradeoff between output and inflation volatility. This tradeoff disappears when the economy becomes sufficiently flexible. In that case the central bank's efforts at stabilizing inflation and output are always welfare improving.

For full details and related downloads, please visit:

Bibliographic Reference

De Grauwe, P and Ji, Y. 2017. 'Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model'. London, Centre for Economic Policy Research.