A Generalized Variable Elasticity of Substitution Model of New Economic Geography

Sylvain Barde

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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).

Keywords: new economic geography; variable mark-ups; monopolistic competition; flexible varieties aggregator (search for similar items in EconPapers)
Date: 2008-10
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01066187
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Working Paper: A Generalised Variable Elasticity of Substitution Model of New Economic Geography (2008)
Working Paper: A Generalized Variable Elasticity of Substitution Model of New Economic Geography (2008)
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