The Aggregate Implications of Regional Business Cycles

Martin Beraja, Erik Hurst and Juan Ospina-Tejeiro

No 21956, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Making inferences about aggregate business cycles from regional variation alone is diffcult 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-codes: E24 E31 E32 R12 R23 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-geo, nep-mac and nep-ure
Note: EFG IFM ITI ME
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Citations: View citations in EconPapers (67)

Published as Martin Beraja & Erik Hurst & Juan Ospina, 2019. "The Aggregate Implications of Regional Business Cycles," Econometrica, Econometric Society, vol. 87(6), pages 1789-1833, November.

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