Macroeconomic Implications of Agglomeration
45 Pages Posted: 17 Jan 2010 Last revised: 17 Dec 2011
Date Written: November 10, 2011
Cities exist because of the productivity gains arising from clustering production and workers, a process called agglomeration. How important is agglomeration for aggregate growth? This paper constructs a dynamic stochastic general equilibrium model of cities and uses it to estimate the effect of local agglomeration on aggregate growth. We combine aggregate data and city-level panel data to estimate our model's parameters by the Generalized Method of Moments. The estimates imply that local agglomeration has an economically and statistically significant impact on the growth rate of per capita consumption, raising it by about 10 percent. Lending credibility to this finding, we demonstrate that our model reproduces important features of the cross-section of cities.
Keywords: Balanced Growth, Economic Growth, Productivity, Externalities, Agglomeration
JEL Classification: E0, O4, R0
Suggested Citation: Suggested Citation