In this paper we assess the effects of increasing competition in the service sector in one country of the euro area. We focus on Italy, which, based on cross-country comparisons, stands out as the country with the highest markups in nonmanufacturing industries among the OECD countries. We propose a two-region (Italy and the rest of the euro area) dynamic stochastic general equilibrium model where we introduce nontradable goods as a proxy for services and we allow for monopolistic competition in labor, manufacturing, and services markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. According to the results, reducing the markups in services to the levels prevailing in the rest of the euro area induces in the long run an increase in Italian GDP equal to 11% and an increase in welfare (measured in terms of steady state consumption equivalents) of about 3.5%. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited: consumption, investment, and GDP increases are relatively small.
Nontradable Goods and Fiscal Multipliers