This paper discusses which changes in the architecture of a standard CGE model are needed in order to introduce effects of trade and firm het- erogeneity à la Melitz. Starting from a simple specification with partial equilibrium, one primary production factor and one industry, the frame- work is progressively enriched by including multiple factors, intermedi- ate inputs, multiple industries (with a mixture of differentiated and non- differentiated products), and a real general equilibrium closure. There- fore, the model structure is gradually made similar to a full-fledged CGE. Calibration techniques are discussed, and a number of changes from the original Melitz’s assumptions are also proposed. It is argued that the in- clusion of industries with heterogeneous firms in a CGE framework does not simply make the Melitz model “operational”, but allows accounting for structural effects that may significantly affect the nature, meaning and implications of the model results.

Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications

ROSON, Roberto;
2014-01-01

Abstract

This paper discusses which changes in the architecture of a standard CGE model are needed in order to introduce effects of trade and firm het- erogeneity à la Melitz. Starting from a simple specification with partial equilibrium, one primary production factor and one industry, the frame- work is progressively enriched by including multiple factors, intermedi- ate inputs, multiple industries (with a mixture of differentiated and non- differentiated products), and a real general equilibrium closure. There- fore, the model structure is gradually made similar to a full-fledged CGE. Calibration techniques are discussed, and a number of changes from the original Melitz’s assumptions are also proposed. It is argued that the in- clusion of industries with heterogeneous firms in a CGE framework does not simply make the Melitz model “operational”, but allows accounting for structural effects that may significantly affect the nature, meaning and implications of the model results.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/42261
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