Aggregate Effects and Measuring Regional Dynamics

Abstract

Empirical models of regional adjustment often control for aggregate effects when estimating the impact of region-specific shocks on local economies. It is, however, difficult to filter out the effects of aggregate shocks—such as oil shocks, uncertainty shocks, or national recessions—because the incidence of these shocks varies across space and time. We propose an improved econometric method to control for this form of spatiotemporal heterogeneity, thereby yielding more accurate estimation of the effects of local shocks on regional economies. Applying the method to US states, we find that labour demand shocks are mostly absorbed through changes in participation; the migration response to these shocks is limited; and recoveries are highly protracted. Full paper available at http://doi.org/10.1111/pirs.12441

Keywords: aggregate shocks, factor model, labour mobility, migration, spatiotemporal heterogeneity