Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment

Abstract

Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade.

Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model‐Based Assessment

“…In the US and in the RW, the corresponding markups are set to 28%, 16% and 20%. Our values are in line with similar studies, such as Bayoumi et al (), Faruqee et al () and Everaert and Schule (). Many, if not all of these studies refer to Jean and Nicoletti () and Oliveira Martins et al () and Oliveira Martins and Scarpeta () for estimates of markups on the basis of data from the Organization of Economic Co‐operation and Development.…”

“…As such, we are able to catch non‐linear effects associated with the change in the markup level. However, simulations suggest that even if non‐linearities play a certain role (as also stressed by Bayoumi et al ) they do not change significantly our results.…”

“…We have conducted some simulations by starting from different initial markup levels. The lower the initial markup level, the higher the benefits from a given reduction to a (new) final level, as the economy starts from a level that is closer to perfect competition and the markup enters affects households and firms' behaviour in a non‐linear way (see also on this point Bayoumi et al ). However, results are robust to changes in the initial level that are relatively small and, hence, consistent with empirical evidence.…”

Lower Bounds on Approximation Errors to Numerical Solutions of Dynamic Economic Models

“…Perturbation methods are commonly used in the literature on new Keynesian models, and they are generally viewed as acceptable methods. Moreover, linear perturbation methods are currently used by all central banks for solving their large-scale new Keynesian macroeconomic models for forming monetary policy and projections, for example, the International Monetary Fund's Global Economy Model, GEM (Bayoumi, Laxton, and Pesenti (2001)), the U.S. Federal Reserve Board's SIGMA model (Erceg, Guerrieri, and Gust (2006)), the Bank of Canada Terms of Trade Economic Model, ToTEM (Dorich, Johnston, Mendes, Murchison, and Zhang (2013)), the European Central Bank's New Area-Wide Model, NAWM (Coenen, McAdam, and Straub (2008)), the Bank of England COMPASS model (Burgess, Fernandez-Corugedo, Groth, Harrison, Monti, Theodoridis, and Waldron (2013)), and the Swedish Riksbank's Ramses II model (Adolfson, Laséen, Christiano, Trabandt, and Walentin (2013)). The accuracy of perturbation solutions is not assessed in these applications.…”

Arrow-Calvo Price Staggering

“…Galí and Gertler, 1999;McAdam and Willman, 2004;Roberts, 2005;Welz, 2005;Matheron, 2006) and its importance underscored by its widespread adoption into small theoretical and large policy models (e.g. Clarida et al, 1999;Woodford, 2003;Bayoumi et al, 2004;Coenen et al, 2008). 1 Despite its popularity a key weakness of Calvo staggering relates to the 'time-dependent' nature of its price-resetting signal.…”