Research Discussion Papers, Bank of Finland
No 5/2006:
Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy
Juha Kilponen ()
and Antti Ripatti ()
Abstract: 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.
Keywords: competition; dynamic general equilibrium; public finance; (follow links to similar papers)
JEL-Codes: C68; E60; (follow links to similar papers)
54 pages, April 19, 2006
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