Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications

Roberto Roson and Kazuhiko Oyamada

No 63, IEFE Working Papers from IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy

Abstract: This paper discusses which changes in the architecture of a standard CGE model are needed in order to introduce effects of trade and firm heterogeneity à la Melitz. Starting from a simple specification with partial equilibrium, one primary production factor and one industry, the framework is progressively enriched by including multiple factors, intermediate inputs, multiple industries (with a mixture of differentiated and nondifferentiated products), and a real general equilibrium closure. Therefore, the model structure is gradually made similar to a full-fledged CGE. Calibration techniques are discussed, and a number of changes from the original Melitz’s assumptions are also proposed. It is argued that the inclusion of industries with heterogeneous firms in a CGE framework does not simply make the Melitz model “operational”, but allows accounting for structural effects that may significantly affect the nature, meaning and implications of the model results.

Keywords: Computable General Equilibrium Models; Melitz; Firm Heterogeneity; International Trade (search for similar items in EconPapers)
JEL-codes: C63 C68 D51 D58 F12 L11 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2014
New Economics Papers: this item is included in nep-cmp and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications (2014)
Working Paper: Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications (2014)
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