Dynamics effects of regulation and deregulation in goods and labour markets

It has been increasingly argued in recent economic literature that deregulation not only in the labour but also in the product market is beneficial for labour market outcomes. The results offered to support this argument, however, are controversial. So far the debate has been concerned with comparative static results. In our paper, we reassess the consequences of deregulation in a dynamic context. Our model is a dynamic counterpart of Blanchard and Giavazzi’s (2003) prototype model. We show that product and/or labour market liberalisation still increase the equilibrium employment and wage rates. However, deregulation may induce stability loss and endogenous fluctuations