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A Generalised Variable Elasticity of Substitution Model of New Economic Geography

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  • Sylvain Barde

    (Observatoire Français des Conjonctures Économiques)

Abstract

This paper analyses the methodology developed by Behrens and Murata (2007) to introduce variable mark-ups into models of monopolistic competition. Their risk- aversion explanation to the presence of ¯xed mark-ups in the Dixit and Stiglitz (1977) model is validated; however, we show that their constant absolute risk aversion solution ignores existing mechanisms found in the new Keynesian literature. From these we develop a model of new economic geography with a variable elasticity of substitution and variable mark-ups consistent with Behrens and Murata (2007). However, we argue that from both a theoretical and empirical perspective this new Keynesian approach is preferable to the solution of Behrens and Murata (2007).

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Bibliographic Info

Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2008-33.

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Date of creation: 2008
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Handle: RePEc:fce:doctra:0833

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  7. BEHRENS, Kristian & MURATA, Yasusada, 2006. "Gains from trade and efficiency under monopolistic competition: a variable elasticity case," CORE Discussion Papers 2006049, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  10. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  11. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September.
  12. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  13. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-30, April.
  14. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
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  17. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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