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MACROECONOMIC EFFECTS OF GREATER COMPETITION IN THE SERVICE SECTOR: THE CASE OF ITALY

Published online by Cambridge University Press:  01 October 2010

L. Forni ,
A. Gerali  and
M. Pisani
L. Forni*
Affiliation:
Bank of Italy
A. Gerali*
Affiliation:
Bank of Italy
M. Pisani*
Affiliation:
Bank of Italy
*
[email protected]
Address correspondence to: Andrea Gerali, Economic Outlook and Monetary Policy Department, Banca d'Italia, via Nazionale 91, 00184 Rome, Italy; e-mail: [email protected]
[email protected]
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Abstract

In this paper we assess the effects of increasing competition in the service sector in one country of the euro area. We focus on Italy, which, based on cross-country comparisons, stands out as the country with the highest markups in nonmanufacturing industries among the OECD countries. We propose a two-region (Italy and the rest of the euro area) dynamic stochastic general equilibrium model where we introduce nontradable goods as a proxy for services and we allow for monopolistic competition in labor, manufacturing, and services markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. According to the results, reducing the markups in services to the levels prevailing in the rest of the euro area induces in the long run an increase in Italian GDP equal to 11% and an increase in welfare (measured in terms of steady state consumption equivalents) of about 3.5%. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited: consumption, investment, and GDP increases are relatively small.

Keywords

CompetitionMarkupsMonetary Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 5 , November 2010 , pp. 677 - 708
Copyright
Copyright © Cambridge University Press 2010

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