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2006 OECD Economic Surveys: Denmark 2006

image of OECD Economic Surveys: Denmark 2006

This edition of OECD's periodic survey of the Danish economy finds overall good performance but warns of overheating and a weak outlook.  It examines in more detail raising the labour supply to safeguard welfare, improving educational provision and making incentives more compatible with societal needs, and introducing more flexibility and less subsidy in housing. 

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Reforms Can Help to Maintain Growth

The recent performance of the Danish economy is impressive with above-trend GDP growth, decreasing unemployment and high budget and current account surpluses. However, this chapter argues that there is now a risk of overheating, not least as the monetary policy stance that Denmark “imports” from the euro area through its fixed exchange rate regime is quite expansionary in the current situation. This is reinforced by a stronger transmission of interest rate changes to the real economy than in previous cycles. Rapidly increasing house prices – which seem to lose touch with fundamentals – add further stimulus to private consumption. The chapter discusses the policy options to ease near-term capacity constraints: continuing a prudent fiscal policy and boosting labour supply. Such policies are also necessary for long-run fiscal sustainability. Finally, the chapter analyses productivity growth and the role of terms-of-trade trends, which are one aspect of how globalisation affects the economy.

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