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Economic Growth in Small Open Economies pp 105–135Cite as

Palgrave Macmillan

Markets and Distortions

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Abstract

The chapter analyzes the efficiency of capital and labor markets, using an extended version of the neoclassical growth model. Based on the optimality conditions of the model, distortions—wedges—are introduced into the empirical counterpart of these equations. The wedges can be computed as residuals from easily available data. The empirically measured distortions are compared across countries and over time, and they are also related observed labor and capital tax rates. The chapter finishes with calculations that quantify the growth potential when the distortions are lowered to empirically plausible levels.

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Notes

  1. 1.

    The methodology of business cycle accounting is used in Cavalcanti (2007) for Portugal, Kersting (2007) for Great Britain, and Inaba and Kobayashi (2006) for Japan.

  2. 2.

    This also means that we take into account and handle the serious critiques of the BCA approach described in Christiano and Davis (2006), and Baurle and Burren (2011).

  3. 3.

    Similar to us, Otsu (2010) also uses an open economy framework, but in contrast to the current approach, analysis the business cycle.

  4. 4.

    This equals the value used to define the maximum employment rate above. But we need to take into account that while in our maximum calculations the age group 15–24 is still in school, in the data the majority of the young are already working.

  5. 5.

    UNDP, http://hdr.undp.org/en/content/mean-years-schooling-adults-years.

  6. 6.

    A third option is to use the deterministic version of the model, see, for example, Jones and Sahu (2017).

  7. 7.

    For using empirical expectations in DSGE models, see Milani (2011).

  8. 8.

    http://www.oecd.org/eco/economicoutlook.htm.

  9. 9.

    http://ec.europa.eu/eurostat/web/products-datasets/-/gov_a_tax_itr.

  10. 10.

    This assumption does not change the equilibrium conditions, but makes the derivation a bit more transparent.

References

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  • Cavalcanti, T. V. (2007). Business cycle and level accounting: The case of Portugal. Portuguese Economic Journal, 6, 47–64.

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  • Otsu, K. (2010). A neoclassical analysis of the Asian crisis: Business cycle accounting for a small open economy. The B.E. Journal of Macroeconomics, 10, 1–39.

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Authors and Affiliations

  1. Centre for Economic and Regional Studies, Budapest, Hungary

    István Kónya

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  1. István Kónya
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Kónya, I. (2018). Markets and Distortions. In: Economic Growth in Small Open Economies. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-69317-0_7

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  • DOI: https://doi.org/10.1007/978-3-319-69317-0_7

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-69316-3

  • Online ISBN: 978-3-319-69317-0

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