The Impact of Structural Policies on External Accounts in Infinite-horizon and Finite-horizon Models


  • I thank the anonymous referee, Jan in't Veld, Werner Roeger, Janos Varga and participants of the conference “Intra-European Imbalances, Global Imbalances, International Banking, and International Financial Stability” for helpful comments and discussions. The views in the paper are personal and should not be attributed to the European Commission.


The paper uses QUEST III to compare the impact of product market reform, labor market reform, and fiscal devaluation on economic activity and external accounts in infinite-horizon and finite-horizon versions of the model for a small open economy in monetary union with tradable and non-tradable sectors. The impact of structural policies on external positions tends to be stronger and more persistent, but also more diverse in the finite-horizon specification because of the impact of structural reforms on financial wealth and its transmission to consumption demand in the finite-horizon setting. The improvement in the net foreign asset position tends to be stronger if structural reforms are accompanied by fiscal consolidation and if countries start with high pre-reform levels of net foreign debt.