Type
Working paper
Titre
A Generalized Variable Elasticity of Substitution Model of New Economic Geography
Dans
Documents de travail de l'OFCE
Auteur(s)
Collection
Documents de travail de l'OFCE : 2008-33
Mots clés
new economic geography, variable mark-ups, monopolistic competition, flexible varieties aggregator
Résumé
EN
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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