The Aggregate Implications of Regional Business Cycles

82 Pages Posted: 16 Jan 2019

See all articles by Martin Beraja

Martin Beraja

University of Chicago

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Juan Ospina

University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: January 15, 2019

Abstract

Making inferences about aggregate business cycles from regional variation alone is difficult because of economic channels and shocks that differ between regional and aggregate economies. However, we argue that regional business cycles contain valuable information that can help discipline models of aggregate fluctuations. We begin by documenting a strong relationship across US states between local employment and wage growth during the Great Recession. This relationship is much weaker in US aggregates. Then, we present a methodology that combines such regional and aggregate data in order to estimate a medium-scale New Keynesian DSGE model. We find that aggregate demand shocks were important drivers of aggregate employment during the Great Recession, but the wage stickiness necessary for them to account for the slow employment recovery and the modest fall in aggregate wages is inconsistent with the flexibility of wages we observe across US states. Finally, we show that our methodology yields different conclusions about the causes of aggregate employment and wage dynamics between 2007 and 2014 than either estimating our model with aggregate data alone or performing back-of-the-envelope calculations that directly extrapolate from well-identified regional elasticities.

JEL Classification: E24, E31, E32, R12, R23

Suggested Citation

Beraja, Martin and Hurst, Erik and Ospina, Juan, The Aggregate Implications of Regional Business Cycles (January 15, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-04, Available at SSRN: https://ssrn.com/abstract=3316408 or http://dx.doi.org/10.2139/ssrn.3316408

Martin Beraja

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Erik Hurst (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juan Ospina

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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