It has always struck me that the first order consequence of making it easier for firms to fire people in the middle of a depression would be that…firms would fire more people. And it has never struck me that this would be desirable.
Now Gauti Eggertsson, Andrea Ferrero and Andrea Raffo have a new paper pointing out that at the zero lower bound, where monetary policy cannot offset the deflationary impact of structural reforms that would otherwise be desirable (lowering mark-ups in product and labour markets), such reforms can be contractionary (by generating expectations of deflation and raising real interest rates).
All of which seems obvious once you think about it, but it needed someone to point it out. And this is a problem for a continent whose leaders refuse to take the demand side of the economy seriously, and are hoping that “structural reforms” will obviate the need for them to rethink their macroeconomic strategy.
Another chance for Paul Krugman to cite St Agustin!