Blue States and Red States: GDP Synchronicity and Risk Sharing Channels

Abstract

We examine state GDP comovement and consumption risk-sharing channels within the United States as a whole, and among states whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We document three facts: (1) state GDP growth is asynchronous, and Blue and Red states are particularly out of sync; (2) at the same time, interstate consumption risk-sharing is very high – it is high even across the political divide, and it is high even where the role of fiscal flows is minimal; and (3) the channels of risk sharing across Blue, Red, and Swing states are quite different.

Keywords: monetary union, consumption risk-sharing, economic and political divergence

JEL Classification: F45, F42, F33, F02