Appendix: A Brief Note on the GEM
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In addition to the standard definition of unemployment, this also includes unemployed pensioners, trainees and workers included in active labor market measures. See Kurri (2004).
Finland’s R&D expenditures were 3.5 percent of GDP in 2002, well above the EU15 average of 1.9 percent, second only to Sweden (at 4.3 percent of GDP). However, the electronics sector alone accounted for slightly more than half of the total. See Statistics Finland (2004).
A comprehensive overview of Finland’s policies to promote employment is contained in the National Action Plan For Employment 2004 (Ministry of Labor 2004).
An overview of the authorities’ record and intentions regarding product market competition is contained in the Ministry of Finance’s annual “Product and Capital Market Reforms in Finland” (2004c).
Labor productivity growth averaged 2.1 percent during 1995–2003, and 2.3 percent during 1990–2003. However, these rates were influenced by the ICT-led surge in economic activity in the late 1990s, and the rebound from the deep recession in the early 1990s, during which employment declined significantly more than the drop in output.
The authorities’ long-term projection begins in 2008, the last year of the forecast horizon for the Stability Program. The staff scenario is based on its WEO projections for 2004-08, which are broadly similar, especially regarding the overall general government balance and the gross debt/net asset positions.
This compares to a deficit of 7½ percent in the authorities’ scenario, reflecting the staff’s less optimistic macroeconomic outlook, and the resulting less favorable debt dynamics.
The concept of fiscal sustainability, and its practical implications for finite time period projections, are discussed inBlanchard et al (1990).
The magnitude of the impact of reforms on economic activity estimated in this study is comparable to that found elsewhere. For instance, an OECD study on Finland finds that labor productivity could increase by 3 to 3½ percent and producer prices could decline by 3–4 percent (OECD, 2004). A similar study for Denmark finds that labor and product market reforms could increase output by about 4 percent and employment by 2¾ percent (IMF, 2004a).
Since Finland is small relative to the euro area, it is assumed that the nominal interest rate remains unchanged from the baseline scenario.
Given that Finland, as a member of the common currency area, has an exogenous monetary policy, the model is calibrated to ensure that the nominal interest rates are the same as in the euro area.