Front Matter

Front Matter Page

IMF Country Report No. 18/178

DENMARK

SELECTED ISSUES

June 2018

This Selected Issues paper on Denmark was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 5, 2018.

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Front Matter Page

DENMARK

SELECTED ISSUES

June 5, 2018

Approved By

Miguel Segoviano

Prepared by Shafik Hebous (FAD), Cory Hillier (LEG), Alexander Klemm (FAD), Evan Papageorgiou, Vladimir Pillonca, and Tigran Poghosyan (All EUR).

Contents

  • INVESTMENT SLOWDOWN IN DENMARK: DIAGNOSIS AND POLICY OPTIONS

  • A. Introduction

  • B. Investment Dynamics in Denmark: Stylized Facts

  • C. Determinants of Investment Slowdown

  • D. Empirical Analysis: The Accelerator Model

  • E. Diving Deeper: The Role of Leverage and Product Market Reforms

  • F. Conclusions and Policy Implications

  • FIGURES

  • 1. Dynamics of Gross Fixed Capital Formation (GFCF)

  • 2. Implications of the Investment Slowdown: Drop in Labor Productivity Growth

  • 3. Implications of the Investment Slowdown: Surge in the Current Account Surplus

  • 4. GFCG/GDP Ratio: Comparison of Denmark with EU Peers

  • 5. Components Driving the Decline in GFCF

  • 6. Quality of Infrastructure and Public Capital Spending

  • 7. Decomposition of Investment Decline (2007–16)

  • 8. Output Dynamics in Denmark

  • 9. Investment Constraints in Denmark: Evidence from a Firm Survey

  • 10. Leverage in Various Sectors

  • 11. Product Market Regulation (PMR): Denmark Versus OECD Countries

  • 12. Residuals from the Baseline Accelerator Model

  • 13. Residuals from the Baseline Accelerator Model, by Sectors and Categories

  • 14. Residuals from the Augmented Accelerator Model

  • 15. Leverage and Investment-to-GDP Ratio: Denmark vs. Advanced Economies

  • 16. Leverage and Long-run Investment Growth: Estimating the Tipping-Point

  • 17. Impact of Product Market Reforms on Investment

  • 18. Product Market Reforms and Investment: Difference-in-difference Approach

  • 19. PMR in Network and Retail Sectors: Comparison of Denmark with OECD EU Peers

  • TABLES

  • 1. Estimation Results: Baseline Accelerator Model for Denmark

  • 2. Estimation Results: Augmented Accelerator Model for a Panel of OECD Countries

  • References

  • ANNEXES

  • I. Shift-share Analysis of Investment Dynamics

  • II. The Accelerator Model

  • THE ROLE OF ASSET PRICES IN HOUSEHOLDS, PENSION FUNDS, AND CREDIT INSTITUTIONS

  • A. Introduction

  • B. Interaction of Households with the Rest of the Economy

  • C. Household and Pension Fund Balance Sheets

  • D. The Impact of Interest Rates on Asset Prices and Balance Sheets

  • E. Asset Prices and Consumption: Who is More Vulnerable?

  • F. Policy Recommendations and Conclusions

  • FIGURES

  • 1. Stylized Presentation of Private Sector Financial Transactions

  • 2. Private Sector Financial Balance Sheets and Comparison

  • 3. Households, Credit and Leverage

  • 4. Interest Rate Shock: Anatomy of the Impact on Consumption via Wealth Effects

  • 5. Anatomy of Impact on Consumption, Introducing Liabilities Explicity

  • TABLES

  • 1. Total Pension Assets in Major Advanced Economies

  • 2. Impact of Asset Price Shocks on Consumption, Across Different Wealth Groups

  • References

  • ANNEXES

  • I. Estimating the Impact of Interest Rate Shocks on Assets Prices—A Simple Approach

  • II. Summary of Macroprudential Policy Measures in Denmark

  • CAPITAL INCOME TAX REFORM OPTIONS IN DENMARK

  • A. Introduction

  • B. Assessment of Business Taxes

  • C. Integration with Personal Income Taxes

  • D. Reform Options

  • BOXES

  • 1. Denmark’s International Obligations and Commitments Regarding the CIT

  • 2. Tax Certainty

  • FIGURES

  • 1. The Danish Corporate Income Tax Rate in International Comparison

  • 2. Combined CIT and Dividend Tax Rate on Distributed Profits

  • 3. Net Business Population Growth, 2014

  • 4. Long-Term (10-Year) Government Bond Yields in Denmark

  • TABLES

  • 1. Comparison of Key Aspects of the OECD Interim Report and EC Proposal

  • 2. ATAD Implementation in Denmark

  • 3. Top Danish FDI Partners

  • 4. International Approaches to Splitting Wages and Profits of Owner-Run Businesses

  • 5. Empirical Studies of Allowances for Corporate Equity

  • References

  • ANNEX

  • I. Country Experiences with the ACE

Denmark: Selected Issues
Author: International Monetary Fund. European Dept.