For example, a staggered or incomplete reform package that leads to a relatively slow price adjustment – e.g. if labour market reforms precede market reforms – will tend to reinforce disinflationary expectations and negative real interest rate effects. And these effects are likely to be worse if such a package is dominated by reforms that create more disinflationary pressures.
Changes in employment protection legislation, for instance, tend to have negative short-term impact on output even under normal monetary conditions.5 On the other hand, if reforms are designed in a more comprehensive way, such that price adjustment occurs quickly, the positive impact on future income and investment is likely to materialise more quickly, thus in part offsetting any contractionary effects.