ERI Discussion Paper Series No.72
Macroeconomic Performance of the Scandinavian Model

March 1997
Kenichi Kawasaki
(Economic Research Institute, Economic Planning Agency)

A comparison of international price levels suggests persistent differences among the OECD countries. These phenomena raise questions concerning the underlying mechanisms of international and intranational price adjustments.

Although country-specific differentials are observed, empirical studies suggest that Scandinavian-type wage and price determination behavior is also observed to some degree in other countries, particularly in Japan where the international price level is high. In competitive sectors, changes in wages are determined given inflation developments in competitors' markets and reflected in wage developments in the other sectors, where output prices are determined by wage and productivity developments. Therefore it is possible that higher productivity in the competitive sectors brings about higher wage rates in both the competitive and sheltered sectors and results in a higher price level in the economy as a whole. Inflexibility in the adjustment of inter-industry prices could be an important factor bringing about inflexibility in the adjustment of international price levels.

Incorporating the Scandinavian wage and price determination mechanism into a macro econometric model, simulations could explain how Japan's external surplus has remained relatively large in spite of currency appreciation.

On the other hand, it is expected that deregulation measures could contribute to efficient resource allocation and result in higher economic growth. However, flexible wage and price determination and adjustments may bring about volatile fluctuations in real expenditures, output, and income. Comparisons of simulations between the models, one with the Scandinavian model and the other without it, provide an important implication regarding the efficiency of macroeconomic policy measures, including expansion of government investment to stimulate the stagnant economy.

Structure of the whole text

  1. Abstract別ウィンドウで開きます。(PDF-Format 649 KB)
  2. page1
    I. Introduction
  3. page2
    II. Empirical Evidence of Scandinavian Model
    1. page2
      a. Overview of Price Developments
    2. page4
      b. Sectoral Analysis of Wages and Prices
    3. page6
      c. Macroeconomic Implications
  4. page8
    III. Properties of Scandinavian Model
    1. page8
      a. Background
    2. page9
      b. Model
    3. page11
      c. Simulations
  5. page14
    IV. Concluding Remarks
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