The Aggregate Implications of Regional Business Cycles

Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-024

69 Pages Posted: 18 Feb 2016 Last revised: 28 Aug 2016

See all articles by Martin Beraja

Martin Beraja

University of Chicago

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Juan Ospina

University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: February 19, 2016

Abstract

We argue that it is difficult to make inferences about the drivers of aggregate business cycles using regional variation alone because (i) the local and aggregate elasticities to the same type of shock are quantitatively different and (ii) purely aggregate shocks are differenced out when using cross-region variation. We highlight the importance of these confounding factors by contrasting the behavior of U.S. aggregate time-series and cross-state patterns during the Great Recession. In particular, using household and scanner data for the US, we document a strong relationship across states between local employment growth and local nominal and real wage growth. These relationships are much weaker in US aggregates. In order to identify the shocks driving aggregate (and regional) business cycles we develop a semi-structural methodology that combines regional and aggregate data within a model of a monetary union. The methodology uses theoretical restrictions implied by a wage setting equation with nominal wage rigidities. Taking this methodology to the data, we find that a combination of both "demand" and "supply" shocks are necessary to account for the joint dynamics of aggregate prices, wages and employment during the 2007-2012 period in the US while only "demand" shocks are necessary to explain most of the observed cross-state variation. We conclude that the wage stickiness necessary to get demand shocks to be the primary cause of aggregate employment declines during the Great Recession is inconsistent with the flexibility of wages estimated from cross-state variation.

Keywords: Business Cycles, Regional Business Cycles, Aggregate Fluctuations, VAR Identification, Scanner Price Indexes, Regional Economics

JEL Classification: E24, E31, E32, R12, R23

Suggested Citation

Beraja, Martin and Hurst, Erik and Ospina, Juan, The Aggregate Implications of Regional Business Cycles (February 19, 2016). Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-024, Available at SSRN: https://ssrn.com/abstract=2733708 or http://dx.doi.org/10.2139/ssrn.2733708

Martin Beraja

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juan Ospina (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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