Working Paper: CEPR ID: DP4481
Authors: Tamim Bayoumi; Doug Laxton; Paolo Pesenti
Abstract: Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labour 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.
Keywords: competition; markups; monetary policy; Taylor rule
JEL Codes: C51; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing competition in the euro area (F36) | increase in output (E23) |
| increasing competition in the euro area (F36) | increase in consumption in the rest of the world (F62) |
| increasing competition (L13) | reduced monopolistic power of producers and workers (J54) |
| reduced monopolistic power of producers and workers (J54) | increased responsiveness of wages and prices to market conditions (F16) |
| greater competition (L19) | enhanced macroeconomic management (E60) |
| greater competition (L19) | reduced distortions associated with wage-price rigidities (H31) |
| greater competition (L19) | more effective monetary policy (E52) |
| increased competition (L13) | positive spillovers to the rest of the world (F69) |
| increased competition (L13) | favorable terms of trade effects (F14) |