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

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Title: Labour and product market competition in a small open economy – Simulation results using a DGE model of the Finnish economy
Author: Kilponen, Juha ; Ripatti, Antti
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 5/2006
Year of publication: 2006
Publication date: 5.2.2006
Pages: 54
Keywords: avoin talous; Suomi; finanssipolitiikka; markkinat; työmarkkinat; kilpailu; mallit; AINO; DGE
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 increases 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. Key words: competition, dynamic general equilibrium, public finance JEL classification numbers: E60, C68
Rights: https://helda.helsinki.fi/bof/copyright


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