Structural reforms in DSGE models: a case for sensitivity analyses
In a standard DSGE model of the Euro Area derived from the Smets and Wouters' core model and comparable to most institutional models (ECB, EC, IMF, etc.), we shed new light on a popular exercise: pro-competitive (structural) reforms evaluation. First, we provide with a detailed analysis of the underlying mechanisms, insisting on the importance of the household's consumption-leisure arbitrage. We then proceed to a quantitative sensitivity analysis. We show that the simple redefinition of households' utility can lead to additional gains or losses of a few percentage points in output following goods or labour markets pro-competitive reforms. In addition, welfare analyses show that policy recommendations for structural reforms are less clear-cut than those solely based on output gains. Introducing non Ricardian agents allows stylized yet informative inequality analyses showing that goods market reforms reduce inequalities while labour market reforms are neutral. In all, our results advocate for the extensive use of sensitivity analyses in that class of models when used for quantitative policy purposes.