Research / BFI Working PaperJan 16, 2019

The Aggregate Implications of Regional Business Cycles

Martin Beraja, Juan Ospina, Erik Hurst

Making inferences about aggregate business cycles from regional variation alone is difficult because of economic channels and shocks that differ between regional and aggregate economies. However, we argue that regional business cycles contain valuable information that can help discipline models of aggregate fluctuations. We begin by documenting a strong relationship across US states between local employment and wage growth during the Great Recession. This relationship is much weaker in US aggregates. Then, we present a methodology that combines such regional and aggregate data in order to estimate a medium-scale New Keynesian DSGE model. We find that aggregate demand shocks were important drivers of aggregate employment during the Great Recession, but the wage stickiness necessary for them to account for the slow employment recovery and the modest fall in aggregate wages is inconsistent with the flexibility of wages we observe across US states. Finally, we show that our methodology yields different conclusions about the causes of aggregate employment and wage dynamics between 2007 and 2014 than either estimating our model with aggregate data alone or performing back-of-the-envelope calculations that directly extrapolate from well-identified regional elasticities.

More Research From These Scholars

BFI Working Paper Jan 30, 2020

Income Growth and the Distributional Effects of Urban Spatial Sorting

Erik Hurst, Victor Couture, Cecile Gaubert, Jessie Handbury
Topics:  Economic Mobility & Poverty
BFI Working Paper Feb 4, 2020

A Cross-Cohort Analysis of Human Capital Specialization and the College Gender Wage Gap

Carolyn Sloane, Erik Hurst, Dan Black
Topics:  Employment & Wages, Higher Education & Workforce Training
Journal Article Feb 3, 2019

Regional Heterogeneity and the Refinancing Channel of Monetary Policy

Martin Beraja, Andreas Fuster, Erik Hurst, Joseph S. Vavra
Topics:  Uncategorized