Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy
AbstractUsing 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 in-creases 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.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 5/2006.
Length: 54 pages
Date of creation: 19 Apr 2006
Date of revision:
competition; dynamic general equilibrium; public finance;
Find related papers by JEL classification:
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-21 (All new papers)
- NEP-CMP-2006-10-21 (Computational Economics)
- NEP-COM-2006-10-21 (Industrial Competition)
- NEP-DGE-2006-10-21 (Dynamic General Equilibrium)
- NEP-MAC-2006-10-21 (Macroeconomics)
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