Matthias F. Mohr

Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model-Based Assessment

We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, a unilateral markup reduction by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. Second, cross-country coordination of reforms would add extra benefits to each region, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. In the long run German (Portuguese) output would increase by 9.2 (8.6) percent. Third, cross-country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of price competitiveness and real activity. Overall, our results suggest that while reforms implemented individually by each country in the euro area will produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.

Trend-Cycle Decomposition of Output and Euro Area Inflation Forecasts: A Real-Time Approach Based on Model Combination

The paper focuses on the estimation of the euro area output gap. We construct model-averaged measures of the output gap in order to cope with both model uncertainty and parameter instability that are inherent to trend-cycle decomposition models of GDP. We first estimate nine models of trend-cycle decomposition of euro area GDP, both univariate and multivariate, some of them allowing for changes in the slope of trend GDP and/or its error variance using Markov-switching specifications, or including a Phillips curve. We then pool the estimates using three weighting schemes. We compute both ex-post and real-time estimates to check the stability of the estimates to GDP revisions. We finally run a forecasting experiment to evaluate the predictive power of the output gap for inflation in the euro area. We find evidence of changes in trend growth around the recessions. We also find support for model averaging techniques in order to improve the reliability of the potential output estimates in real time. Our measures help forecasting inflation over most of our evaluation sample (2001-2010) but fail dramatically over the last recession. JEL Classification: C53, E32, E37