Boom, Bust, and Regional Growth Rates

Abstract

If the primary effect of economic volatility is on consumption—requiring consumers to smooth over the rough spots—recent studies have shown that the business cycle has relatively little effect on consumer welfare. However, the primary effect of volatility may not be on consumption but on investment and productivity. If investors shift their money from volatile cities and times to stable ones, or if productivity depends on predictable demand and a stable work-force, volatility may hinder urban growth. Analysis of annual growth rates in U.S. metropolitan areas shows that short-term volatility reduced growth substantially and that these effects were larger in cities with high long-term volatility. In most metropolitan areas, volatility reduction and growth enhancement efforts would provide roughly equal improvements in consumer utility.