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

Abstract

We examine business cycle divergence and risk sharing within the United States 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 growing, it is larger than across international borders, and it is starkest across Blue and Red regions. At the same time, we find that risk sharing among states is high, even across the political divide. However, the risk sharing mechanisms, including fiscal transfers and migration, differ markedly across the political regions.

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

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