Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models

Kazuhiko Oyamada

No 465, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper shows how an Armington-Krugman-Melitz encompassing module based on Dixon and Rimmer (2012) can be calibrated, and clarifies the choice of initial levels for two kinds of number of firms, or parameter values for two kinds of fixed costs, that enter a Melitz-type specification can be set freely to any preferred value, just as the cases we derive quantities from given value data assuming some of the initial prices to be unity. In consequence, only one kind of additional information, which is on the shape parameter related to productivity, just is required in order to incorporate Melitz-type monopolistic competition and heterogeneous firms into a standard applied general equilibrium model. To be a Krugman-type, nothing is needed. This enables model builders in applied economics to fully enjoy the featured properties of the theoretical models invented by Krugman (1980) and Melitz (2003) in practical policy simulations at low cost.

Keywords: Economics; Applied general equilibrium; Monopolistic competition; Firm heterogeneity; Calibration; Neutrality (search for similar items in EconPapers)
JEL-codes: C63 C68 D58 F12 L11 (search for similar items in EconPapers)
Date: 2014-03-01
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (8)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 465. 2014-03-01

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