Labour and Product Market Competition in a Small Open Economy − Simulation Results Using a DGE Model of the Finnish Economy

54 Pages Posted: 30 Aug 2007

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Antti Ripatti

University of Helsinki; Bank of Finland

Date Written: 2006

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.

Keywords: competition, dynamic general equilibrium, public finance

JEL Classification: E60, C68

Suggested Citation

Kilponen, Juha and Ripatti, Antti, Labour and Product Market Competition in a Small Open Economy − Simulation Results Using a DGE Model of the Finnish Economy (2006). Bank of Finland Research Discussion Paper No. 5/2006. Available at SSRN: https://ssrn.com/abstract=1010631 or http://dx.doi.org/10.2139/ssrn.1010631

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Antti Ripatti

University of Helsinki ( email )

P.O. Box 17
Helsinki, 00014
Finland
+358505203679 (Phone)

HOME PAGE: http://www.ripatti.net

Bank of Finland ( email )

Box 160
Helsinki, 00101
Finland

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