Labour and product market competition in a small open economy – Simulation results using a DGE model of the Finnish economy
Kilponen, Juha; Ripatti, Antti (05.02.2006)
Numero
5/2006Julkaisija
Bank of Finland
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201501291022Tiivistelmä
Using the DGE model of the Finnish Economy (the 'Aino' model), we
study the response of the economy to reforms in both labour and
product markets.The reforms are two-fold.We assume that the wage
mark-up, ie the monopoly power of wage-setters is gradually reduced
by 5 percentage points.At the same time, the degree of competition
is increased, ie price margins are exogenously reduced by 2
percentage points.These reforms imply a very favourable outcome of
the economy.Both consumption and employment increases permanently
and the reforms are welfare enhancing.Public balances improve
giving room for 1.5 percentage point cut in income taxes.Our
simulation exercises clearly demonstrate that such reforms may help
in financing the future fiscal burden of an ageing population.
Key words: competition, dynamic general equilibrium, public finance
JEL classification numbers: E60, C68
study the response of the economy to reforms in both labour and
product markets.The reforms are two-fold.We assume that the wage
mark-up, ie the monopoly power of wage-setters is gradually reduced
by 5 percentage points.At the same time, the degree of competition
is increased, ie price margins are exogenously reduced by 2
percentage points.These reforms imply a very favourable outcome of
the economy.Both consumption and employment increases permanently
and the reforms are welfare enhancing.Public balances improve
giving room for 1.5 percentage point cut in income taxes.Our
simulation exercises clearly demonstrate that such reforms may help
in financing the future fiscal burden of an ageing population.
Key words: competition, dynamic general equilibrium, public finance
JEL classification numbers: E60, C68