Improving competition in the non-tradable goods and labour markets: the Portuguese case

Abstract

This study assesses the macroeconomic impacts of increasing competition in the nontradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring Blanchard-Yaari households, a multi-sectoral production structure and a number of nominal and real rigidities.We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase temporarily, driving consumption and output temporarily downwards.

Bayesian Estimation of a DSGE Model for the Portuguese Economy

“…ζ was set at 1.005, which as referred in Almeida et al (2008) corresponds to the euro area's potential output growth and also seems a plausible estimate for Portugal in view of the results of Almeida and Félix (2006). π =π = π * was set at 1.005, in line with the ECB goal of 2% for the euro area annual inflation rate.…”

“…to analyse fiscal policy issues; the Bank of Sweden who has used its model, described in Adolfson, Laséen, Lindé and Villani (2007), both for policy analysis and forecasting; the Bank of Finland with the AINO model, that can be seen in Kilponen and Ripatti (2006), which besides being applied to the study of specific issues, like ageing and demographics, is already the official forecasting model of For what has been exposed, New-Keynesian DSGE models and their estimation is certainly one of the most interesting and promising fields in modern macroeconometric research, from which no country should be left out. In the case of Portugal, very few exercises have been performed using DSGE models, namely: Pereira and Rodrigues (2002) (DGE model) and Fagan, Gaspar and Pereira (2004) where calibrated New-Keynesian models are used to analyse the impact of a tax reform package and the macroeconomic effects of structural changes, respectively; Silvano (2006) where an RBC model estimated with GMM is used to study business cycle movements; and Almeida et al (2008) and Adão (2009) where the effects of increasing competition in the nontradable goods and labour markets and a monetary policy shock are examined, respectively, using calibrated large-scale New-Keynesian models. However, no attempt has yet been made to estimate a New-Keynesian DSGE model using Portuguese data, which has led to the conduct of this study.…”

“…These comprise the domestic good price markup, for which an unreasonably high markup was obtained, and the elasticity of substitution between final export good and foreign good, for which a value below one was obtained, which violates the assumption that this elasticity must be larger than one. µ d was set at 1.15 and ϑ * at 1.5 following Almeida et al (2008). 34…”

“…The steady-state government to domestic output ratio, was set to match its empirical counterpart implying g y = 0.14. The steady-state tax rates were taken from Almeida et al (2008), where τ c = 0.304 and τ l = 0.287, and the target debt to GDP ratio, b gdp tar , was set at 60%, the upper bound of the limit imposed the Maastricht Treaty criteria. The capital income share, the quasi-share of import good in composite good, the quasi-share of domestic export good in foreign good production and the elasticity of substitution between domestic and import goods were then calibrated to closely follow Almeida et al (2008) and ensure that the model key steady-state ratios closely follow the correspondent ratios in the data.…”

“…The model is greatly inspired in the works of Adolfson, Laséen, Lindé and Villani (2007) and Almeida, Castro and Félix (2008). The first one corresponds to a model estimated for Sweden (which like Portugal is a small-open economy) using Bayesian techniques.…”