Business Cycle Divergence and Risk Sharing: Blue States and Red States

Abstract

We examine business cycle divergence and risk sharing within the United States as a whole and in U.S. 'regions' whose populations have consistently voted either Democrat (Blue) or Republican (Red) in national elections. We find that business cycle divergence across the states is larger than across international borders; and it is starkest-and growing-across Blue and Red regions. The risk sharing mechanisms, including fiscal transfers and migration, differ markedly across the political regions. However, allowing for real exchange rate adjustment through Prices, for migration, and for purchases of durable goods, we find that overall risk sharing is high, even across the political divide.

Keywords: Economic Integration, Intra-national, Consumption Risk Sharing

JEL Classification: E31, E32, F36, F21, E44