Resilience, consumption smoothing and structural policies

A dynamic stochastic general equilibrium model with non-clearing labour markets and imperfect competition is estimated for 21 OECD countries. The model provides for parameters both for preferences and technology and for the degree of structural rigidities on labour and product markets. These parameters are matched with policy indicators, establishing a relation between the model-based employment adjustment cost parameter and the strictness of employment protection legislation, and between the average size of the mark-up on product markets and the OECD product market regulation indicator. Policy simulations are carried out by modifying the parameters relating to labour and product market rigidities in order to evaluate the impact of a more flexible markets on consumption smoothing. Moreover, the paper establishes a trade-off between more volatile employment and improved consumption smoothing possibilities. Finally, using a standard utilitarian welfare function, the model assesses the optimal stance of structural policies when taking this trade-off into account.