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

25 Pages Posted: 15 Feb 2018 Last revised: 12 Feb 2019

See all articles by David C. Parsley

David C. Parsley

Vanderbilt University - Finance

Helen Popper

Santa Clara University - Leavey School of Business - Economics Department

Date Written: November 3, 2018

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

Suggested Citation

Parsley, David C. and Popper, Helen, Business Cycle Divergence and Risk Sharing: Blue States and Red States (November 3, 2018). Vanderbilt Owen Graduate School of Management Research Paper. Available at SSRN: https://ssrn.com/abstract=3117556 or http://dx.doi.org/10.2139/ssrn.3117556

David C. Parsley

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)

Helen Popper (Contact Author)

Santa Clara University - Leavey School of Business - Economics Department ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-6952 (Phone)
(408) 554-2331 (Fax)

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