DP16466 Dynamic Spatial General Equilibrium

Author(s): Benny Kleinman, Ernest Liu, Stephen J. Redding
Publication Date: August 2021
Keyword(s): Economic Geography, migration, spatial dynamics, Trade
JEL(s): F14, F15, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16466

We develop a dynamic spatial general equilibrium model with forward-looking investment and migration decisions. We characterize analytically the transition path of the spatial distribution of economic activity in response to shocks. We apply our framework to the reallocation of US economic activity from the Rust Belt to the Sun Belt from 1965-2015. We find slow convergence to steady-state, with US states closer to steady-state at the end of our sample period than at its beginning. We find substantial heterogeneity in the effects of local shocks, which depend on capital and labor dynamics, and the spatial and sectoral incidence of these shocks.