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The national impact of regional policy: demand-side policy simulation with labour market constraints in a two-region computable general equilibrium model

Gilmartin, M. and Learmonth, D. and McGregor, P.G. and Swales, J.K. and Turner, K. (2007) The national impact of regional policy: demand-side policy simulation with labour market constraints in a two-region computable general equilibrium model. Discussion paper. University of Strathclyde, Glasgow, Scotland.

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Abstract

UK governments generally advocate regional policy as a means of reducing regional disparities and stimulating national growth. However, there is limited comprehension regarding the effects of regional policy on non-target economies. This paper examines the system-wide effects on the Scottish and rest of UK (RUK) economies of an increase in Scottish traded sector exports to the rest of the world. The research is carried out in an inter-regional Computable General Equilibrium framework of the Scottish and RUK economies, under alternative hypotheses regarding wage determination and inter-regional migratory behaviour. The findings suggest that regional policy can have significant national spillover effects, even when the target region is small relative to the RUK. Furthermore, the configuration of the labour market is important in determining the post-shock adjustment path of both economies. In particular, while Scottish economy results are sensitive to alternative versions of how regional labour markets function, RUK region effects prove to be even more so.