Blue States and Red States: GDP Comovement and Consumption Risk Sharing

Abstract

We examine GDP comovement and consumption risk-sharing channels within the United States as a whole and in U.S. 'regions' whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We find that (1) state GDPs hardly comove, and the comovement is particularly low across the Blue and Red regions; (2) those regions' consumption risk sharing mechanisms differ markedly; but (3) accounting for migration and other channels overall interstate consumption risk sharing is high: it is high even across the political divide, and even where the role of fiscal flows is minimal. The evidence suggests that political differences do not necessarily prevent successful participation in a monetary and economic union.

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

JEL Classification: F45, F42, F33, F02