Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

Real GDP growth

2005    2006   2007   2008    2009   2010    2011    2012

.....unchanged nominal inter. rates ^^^^βbaseline
unchanged real inter. rates---fall in real inter. rates

Figure 7. Stimulated impact of a reduction of the NAITU in the euro area under alternative monetary
assumptions

Inflation

Output GAP

Unemployment rate

2.50

2.40

2.30

2.20

2.10

2.0⁰

1.90

1.80

1.70

1.60

1.50

Potential output growth

Structural fiscal balance (% of GDP)

Fiscal balance (% of GDP)

Net government debt (% of GDP)

2005   2006   2007   2008   2009   2010   2011    2012

Note: The Nairu is assumed to fall progressively by 1 percentage point in the first three years of the stimulation.
Nominal exchange rate are kept unchanged relative to baseline in the case of the simulations with fixed nominal
or fixed real interest rates relative to baseline. A flexible exchange rate assumption is retained for the simulation
with a fall in real interest rate. Real government expenditure is kept unchanged at baseline level.

Structural reform in a single country in monetary union

47. In the previous set of simulations it was assumed that all countries embark on structural reform
simultaneously. However, this may not occur in reality, which raises the issue whether the incentives for (or
reward of) structural reform is sufficiently strong for individual countries. There may also be a divide

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