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Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy

  • Kilponen, Juha

    ()

    (Bank of Finland Research)

  • Ripatti , Antti

    ()

    (Bank of Finland Research)

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 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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0605netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 5/2006.

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Length: 54 pages
Date of creation: 19 Apr 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_005
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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  1. Hasan, Iftekhar & Zazzara, Cristiano, 2006. "Pricing risky bank loans in the new Basel II environment," Research Discussion Papers 3/2006, Bank of Finland.
  2. Kilponen, Juha & Leitemo, Kai, 2006. "Robustness in monetary policymaking: a case for the Friedman rule," Research Discussion Papers 4/2006, Bank of Finland.
  3. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  4. Niinimäki, Juha-Pekka & Takalo, Tuomas & Kultti, Klaus, 2006. "The role of comparing in financial markets with hidden information," Research Discussion Papers 1/2006, Bank of Finland.
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