Reforms that lower wages can depress consumer demand in the short term if not rapidly offset by employment gains and the prospect of future productivityrelated income gains that would materialise in normal times. To ensure that the expansionary effect of reforms dominates in the short run, both the sequencing of reforms and the policy mix matter.
As regards sequencing, research has shown 10 2/5  BIS central bankers' speeches  that outcomes may be better if product market reforms precede labour market reforms10 and if product market reforms focus on reducing entry barriers in service sectors with large pent-up demand.11 As regards the policy mix, if there is fiscal space, IMF research 12 has underscored the beneficial effects of carefully designed fiscal packages which can overcompensate for the short-run cost of reforms.