Reports
Discussion Papers
No.525 Behavioral Characteristics of Applied General Equilibrium Models with an Armington-Krugman-Melitz Encompassing Module
March 2015
ABSTRACT
This paper explore how simulation results change with different choice of trade specification, and the strength of preference for traded variety by economic agent differs, utilizing two types of three-region, three-sector AGE model that includes the Armington-Krugman-Melitz Encompassing module based on Dixon and Rimmer (2012). Simulation experiments reveal that: (1) the Melitz-type specification does not always enhance effectiveness of a certain policy change more than the one obtained with the Krugman-type, especially when economic agents’ preference for traded variety is not so strong; (2) there are likely to be points where the volumes of effects obtained with the Melitz-type exceed the ones with the Krugman-type; and (3) the preference of the producers, those who are in the sectors that exhibit increasing returns to scale, for traded variety might be the engine of explosive effects as suggested byFujita, et al. (2000).
Keywords: applied general equilibrium; monopolistic competition; firm heterogeneity; love of variety
JEL classification: C63, C68, D58, F12, L11
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