Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms

Edward Balistreri and Thomas F. Rutherford

Chapter Chapter 23 in Handbook of Computable General Equilibrium Modeling, 2013, vol. 1, pp 1513-1570 from Elsevier

Abstract: This chapter considers alternatives to the Armington formulation of international trade found in most computable general equilibrium (CGE) models. International trade structures consistent with the monopolistic competition models suggested by Krugman (1980) and Melitz (2003) are presented in a computational setting. The Melitz structure of heterogeneous firms is particularly appealing given its consistency with micro-level findings on firm sizes and export behavior. We broaden the accessibility of these advanced trade theories for CGE modelers, and strengthen the link between contemporary CGE analysis and the broader trade community. Small-scale examples of all three theories (Armington, Krugman and Melitz) are introduced under a unified treatment. This is helpful in translating the advanced theories into an environment that is more familiar to CGE modelers. It is also helpful in showing how the different approaches affect outcomes, in a relatively transparent setting. Moving to an applied setting, we offer our approach to calibration and computation of models that include the Melitz heterogeneous firms structure. Our applications include an analysis of economic integration and subglobal climate policy in a model calibrated to the Global Trade Analysis Project (GTAP) data. We do find that the heterogeneous firms structure matters for conclusions drawn from empirical CGE analysis. In our analysis of economic integration we find endogenous entry leading to important variety effects. We also find important productivity effects related to the competitive selection of more productive firms. In our examination of subglobal climate policy we see substantial trade diversion in the Melitz structure. This exacerbates the problem of carbon leakage and impacts the emissions yields from carbon-based tariffs.

Keywords: New trade theory; computable general equilibrium; intraindustry trade; trade policy; climate policy (search for similar items in EconPapers)
JEL-codes: C68 F12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/B9780444595683000237
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:hacchp:v:1:y:2013:i:c:p:1513-1570

DOI: 10.1016/B978-0-444-59568-3.00023-7

Access Statistics for this chapter

More chapters in Handbook of Computable General Equilibrium Modeling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().