A Gravity Model under Monopolistic Competition. CEPS ENEPRI Working Papers No. 33, 1 March 2005

This paper presents an alternative derivation of the gravity equation for foreign trade, which is explicitly based on monopolistic competition in the export markets and which is more general than previously seen in the literature. In contrast with the usual specification, our model allows for the realistic assumption of asymmetry in mutual trade flows. The model is estimated for trade in Europe, producing evidence that trade flows and barriers do indeed reveal strong asymmetry. We then carry out a simulation, based on the estimated model, of the general equilibrium effects (through trade) of the UK’s possible entrance into the economic and monetary union

Speed of Convergence and Relocation – New EU Member Countries Catching up with the Old. CEPS ENEPRI Working Papers No. 34, 1 April 2005

Economic convergence of the EU’s new member countries (NMCs) towards the incumbent EU countries (EU-15) is of paramount importance for both partners, not only in terms of real income but also in nominal terms. This study creates a dynamic, computable general equilibrium model, starting from the Balassa-Samuelson two-sector framework, which is then modified and enlarged (with, among other things, endogenous capital formation, consumption behaviour and labour mobility) to address several other issues such as uncertainty, welfare and sustainability in terms of foreign indebtedness. At the same time, the authors make flows of foreign direct investment (FDI) endogenous in order to evaluate the impact convergence has on the EU-15 and the interaction between the two regions through FDI. The study finds that in a general equilibrium setting, fears of adverse effects resulting from a relocation of EU-15 manufacturing to the NMCs are not well founded

How to Restore Sustainability of the Euro?

We reassess the result of unsustainability of the euro with respect to inflation differentials claimed by Wickens (2007) by specifying an open-economy version of a two-region New Keynesian model for EMU and demonstrate that the result by Wickens does not hold in general. We are able to derive a result that the model is determinate for a wide range of policy rules so that the sustainability of the euro area and the member countries is reached over time with respect to supply and demand shocks and emerged imbalances in price levels and competitiveness. We then enlarge the numerical analysis to consider EMU and sustainability in the case, prevailing currently, where a high debt country should both restore its competitiveness and its fiscal balance, and the policies re-quired from the single monetary policy and the national fiscal policies. Strong fiscal consolidation and far-reaching successful structural reforms are needed to reach sustainability in the sense that emerged imbalances in competitiveness and price levels and the threat of ever mounting debt levels could be eliminated over the medium run. We also illustrate how the current deflationary adjustment involves a major polarisation in economic developments within the euro area.EMU, euro, sustainability, fiscal policy, competitiveness

Minkälaista elvyttävää talous- ja työmarkkinapolitiikkaa pitäisi harjoittaa talouskriisissä?

Suomen talous on joutunut jyrkkään taantumaan, joka uhkaa muodostua syväksi lamaksi. Koska tilanteen taustalla ovat kysynnän hiipuminen kansainvälisessä taloudessa ja kotimaassa ja koska epävarmuuden lisääntyessä likviditeettirajoitusten merkitys kasvaa, voidaan taantumaa lievittävää talouspolitiikkaa arvioida perinteisillä keynesiläisillä välineillä. Poikkeuksena kysyntäjohteiselle analyysille yhdistämme seuraavassa kuitenkin myös tarjonnan, kannattavuuden, kautta tulevat reaktiot tehokkaaseen kysyntään viennissä ja investoinneissa, jotka ovat olennaisia pienessä avotaloudessa. Lisäksi otamme huomioon työvoimakustannusten vaikutuksen työn kysyntään. Arvioimme talouspolitiikkaa työllisyyden kan-nalta julkisessa meno- ja tulotaloudessa, sosiaaliturvajärjestelmässä ja työmarkkinapolitiikassa, jossa palkkamaltti nivotaan verotuksen keventämiseen. Jaottelemme analyysin kahteen vaiheeseen : ensinnäkin tarkastelemme politiikkaa, kun huomiota ei kiinnitetä julkisen talouden tasapainoon, ja toisena tapauksena sitä, kun julkista taloutta sitoo tasapainorajoitus. Arvioimme teoreettisessa osassa johdetut politiikkatulokset myös empiirisesti Suomen osalta sekä arvioihin liittyvän epävarmuuden. Empiiristen tulosten mukaan kilpailukyvyn merkitys korostuu elvytyspolitiikassa sitä enemmän, mitä pitemmällä aikajänteellä operoidaan. Tehokkainta elvytyspolitiikkaa tarkastelluista on palkkamalttiin kytkeytyvä tuloveron alennus. Kuvan täydentämiseksi käsittelemme lopuksi lyhyesti taantumasopeutumista ja työmarkkinapolitiikkaa koskevia aiempia tuloksia mm. EMU-puskureista.talouspolitiikka, työmarkkinat, kerroinvaikutus

Lama, rakennekriisi ja elvytys - näkökohtia toimialoittaisesta sopeutumisesta ja talouspolitiikan mitoituksesta talouskriisin jälkeen

Tutkimuksessa tarkastellaan Suomen kansantalouden tulevaa kehi-tystä, jos ja kun nykyiseen taantumaan liittyy myös rakennekriisi. Sen mukaan talou-den potentiaalisen tuotannon ura saattaa sekä taittua matalammalle tasolle että kasvaa sen jälkeen hitaampaa vauhtia kuin ennen. Näitä kehitysuria arvioidaan toimialoittai-sen tarkastelun avulla. Huomiota kiinnitetään talouspolitiikan mitoituksen ja julkisen velkaantumisen sekä työmarkkinatasapainon tarkasteluun. Tulosten mukaan julkisen sektorin velkakehitys riippuu pitkällä ajalla mm. siitä, kuinka nopea on potentiaalisen tuotannon kasvu. On vaarana, että julkinen velka voi joutua hallitsemattomalle uralle. Keskeisimmin tämä riippuu julkisten palvelujen kallistumisesta muuhun talouteen nähden. Jos tämä saadaan estetyksi, julkinen velkasuhde kääntyisi laskuun kuluvan vuosikymmenen puolivälissä. Taantumaa merkittävästi tasoittava talouspolitiikka voi-si puolestaan johtaa vaikeaan julkiseen lisävelkaantumiseen. Työmarkkinoilta vaadi-taan sekä sopeutumista taantumashokkiin periodin alkupäässä että jatkuvasti maltilli-sempaa palkkojen nousua kuin mihin on viime vuosina totuttu.rakennekriisi, talouspolitiikka, potentiaalinen kasvu

Regulation of Energy Prices in Russia

Russia prices its energy commodities domestically much lower than the prices prevailing in the international market. Using a general equilibrium framework, we analyse reasons for why Russia should or should not use such a price regulation. First, being a major exporter of energy commodities and having considerable monopolistic market power, the country is able to use its supply in order to influence the international energy prices. A rational way to channel this rent to the domestic non-energy sector and to domestic consumers is through a lower, i.e., competitive, domestic price on energy than that in the world market. Second, we introduce the classic infant-industry argument with positive intertemporal spillovers through learning-by-doing linked to current production. These spill-overs are likely to be relevant for manufacturing in a transition economy, which argument creates a further reason for a deviation in the pricing of energy to domestic industrial producers from the world market prices. However, an empirical consideration of these results and the estimation of the learning-by-doing curve suggest that the first effect can in principle be sizeable, while the second is only marginal and that, overall, Russia is currently subsidising its domestic energy prices clearly too much. Further, we conclude that the country should not subsidise its domestic consumers more than its domestic industry, as it does in reality. We also derive the optimal domestic energy tax and show that it is modest in comparison to its current rate. The optimal pricing policy could therefore have a marked positive effect on the international supply of energy by Russia.energy, Russia, international and domestic prices

Structural Reforms in the EU and Political Myopia in Economic Policies

The paper considers economic reforms in the EU using an economic-political model which captures the possible myopia in economic policies, and analyses reforms in taxation, the welfare state, and in the labour and product markets. We show that high taxes and an extensive welfare state are likely to be the case under myopia as compared to the social optimum. We also consider the interaction between the reform activity and the Stability and Growth Pact, which hampers reforms in tax policies, but is conducive to reforming the wel-fare state, the product and labour markets, although the magnitude of these impacts is not marked under the actual tightness of the Pact. We also find that economic and political considerations tend to favour the emphasis to be put on reforming the goods market, instead of the labour market, which has also broadly speaking been the case in reality in the EU. Econometric evidence presented in the paper also supports these results. Coordination of re-forms in the EU is most important in the case of the product market, but not in other fields.economic reform, EU, myopia

A Gravity Model under Monopolistic Competition

gravity model, trade barriers, asymmetry