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A Generalized Variable Elasticity of Substitution Model of New Economic Geography

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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).
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Dates and versions

hal-01066187 , version 1 (19-09-2014)

Identifiers

  • HAL Id : hal-01066187 , version 1
  • SCIENCESPO : 2441/7348

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Sylvain Barde. A Generalized Variable Elasticity of Substitution Model of New Economic Geography. 2008. ⟨hal-01066187⟩
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