Dynamic Spatial General Equilibrium

Author:

Kleinman Benny1,Liu Ernest1,Redding Stephen J.2

Affiliation:

1. Department of Economics, Princeton University

2. Department of Economics and SPIA, Princeton University

Abstract

We incorporate forward‐looking capital accumulation into a dynamic discrete choice model of migration. We characterize the steady‐state equilibrium; generalize existing dynamic exact‐hat algebra techniques to incorporate investment; and linearize the model to provide an analytical characterization of the economy's transition path using spectral analysis. We show that capital and labor dynamics interact to shape the economy's speed of adjustment toward steady state. We implement our quantitative analysis using data on capital stocks, populations, and bilateral trade and migration flows for U.S. states from 1965–2015. We show that this interaction between capital and labor dynamics plays a central role in explaining the observed decline in the rate of income convergence across U.S. states and the persistent and heterogeneous impact of local shocks.

Funder

Princeton University

Centre for Economic Policy Research

Columbia University

Dartmouth College

National Bureau of Economic Research

London School of Economics and Political Science

Stanford University

Yale University

Publisher

The Econometric Society

Subject

Economics and Econometrics

Reference46 articles.

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4. Allen, Treb, Costas Arkolakis, and Xiangliang Li (2016): “Optimal City Structure,” Report, Yale University.

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