Measuring the effects of structural reforms in Malta

Abstract

Abstract. Structural reforms are crucial to boost an economy’s long-term growth potential, enhance its resilienceand increase its flexibility to adjust to adverse shocks. Malta has implemented a number of reforms in recent years, both to its labour and product market, which could in part explain its stellar growth performance after the crisis. Furthermore, EU membership has facilitated the inflow of foreign labour that helped to address critical labour and skill shortages. This paper quantifies the macroeconomic effects of structural reforms in labour and product markets using EAGLE, a large scale multi-country DSGE model, calibrated for the Maltese economy, as a small and open economy in a monetary union. The results show that a 10 percentage point reduction in product and labour mark-ups raises GDP by more than 5% in the long-run. The implementation of the reforms in isolation is associated with adjustment costs but the joint implementation of reforms can, to a large extent, soften the transition costs associated with the reforms. The results are robust to varying levels of mark-ups and different parameterization of the model. A key driver behind this finding is the adjustment in the labour market. This calls for policies to further reduce skill mismatches and for incentives that attract and retain more people in the labour market.

Keywords. Structural reforms, Competition, DSGE models, Malta.

JEL. C53, E27, F41, F47.