Macroeconomic effects of structural reforms and fiscal consolidations: Trade-offs and complementarities

- We study the impact of structural reforms and alternative debt consolidations.
- Structural reforms produce long-run GDP gains, but could entail short-run costs.
- Structural reforms may amplify the short-run costs of debt consolidation.
- Structural reforms and debt consolidation complement each other in the long-run.
- The sooner structural reforms are implemented, the faster the gains materialize.

This paper studies the impact of product and labour market structural reforms and the effects of their joint implementation with alternative debt consolidation strategies. The set-up is a dynamic general equilibrium model calibrated for the Greek economy. The results show that structural reforms produce important long-run GDP gains that materialize earlier, the faster the reforms are implemented. When implemented jointly with fiscal consolidations, structural reforms may amplify the short-run costs of fiscal tightening. The GDP dynamics depend on the fiscal instrument used for public debt consolidation. In the long run, however, there are complementarity gains irrespective of the fiscal instrument used.