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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

Discussion Papers

No.465

March 2014

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: applied general equilibrium; monopolistic competition; firm heterogeneity; calibration; neutrality.
JEL classification: C63, C68, D58, F12, L11.

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