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Macroeconomic effects of greater competition in the service sector: the case of Italy

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Author Info
Lorenzo Forni () (Bank of Italy)
Andrea Gerali () (Bank of Italy)
Massimiliano Pisani () (Bank of Italy)

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Abstract

The paper assesses the effects of increasing competition in the service sector in Italy which, based on cross-country comparisons, is the OECD country with the highest markups in non-manufacturing industries. We propose a two-region (Italy and the rest of the euro area) dynamic general equilibrium model allowing for monopolistic competition in the labor, manufacturing and service markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. Our results indicate that reducing the service sector markups to the levels of the rest of the euro area increases in the long run Italian GDP by 11 percent and welfare (measured in terms of steady state consumption equivalents) by about 3.5 percent. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td706_09/td_706_09_en/en_tema_706.pdf
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Publisher Info
Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 706.

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Date of creation: Mar 2009
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Handle: RePEc:bdi:wptemi:td_706_09

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Related research
Keywords: competition; general equilibrium models; markups; monetary policy;

Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  11. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1113-1128, September. [Downloadable!] (restricted)
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