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A Generalized Variable Elasticity of Substitution Model of New Economic Geography

Sylvain Barde ()

No 2008-33, Sciences Po publications from Sciences Po

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)
JEL-codes: D43 F12 L12 R12 R13 (search for similar items in EconPapers)
Date: 2008-10
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Related works:
Working Paper: A Generalised Variable Elasticity of Substitution Model of New Economic Geography (2008) Downloads
Working Paper: A Generalized Variable Elasticity of Substitution Model of New Economic Geography (2008) Downloads
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