Structural reforms in DSGE models: Output gains but welfare losses

Abstract

In a standard DSGE model of the Euro Area, we shed new light on a popular exercise: pro-competitive reforms evaluation. The simple redefinition of households' utility function can lead to additional gains or losses of a few percentage points in output following such reforms. In addition, policy recommendations from welfare analysis are less clear-cut than those solely based on output gains. Both in the short and in the long run, structural reforms, although unambiguously output-enhancing, can prove detrimental to welfare. In addition, we show that goods market reforms reduce inequalities while labour market reforms are neutral. All in all, our results advocate for the extensive use of sensitivity analyses for quantitative policy purposes.