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

  • Lorenzo Forni

    ()

    (Bank of Italy)

  • Andrea Gerali

    ()

    (Bank of Italy)

  • Massimiliano Pisani

    ()

    (Bank of Italy)

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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Paper provided by Bank of Italy, Economic Research and International Relations Area 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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