Dynamic Spatial General Equilibrium

We develop a dynamic spatial model with forward-looking investment and migration. We characterize the existence and uniqueness of 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 U.S. states are closer to steady-state at the end of our sample period in 2015 than during the prior five decades. We find that much of the observed decline in the rate of income convergence across US states is explained by gradual adjustment given initial conditions, rather than by shocks to fundamentals, and that both capital and labor dynamics contribute to this gradual adjustment. We show that capital and labor dynamics interact with one another to generate slow and heterogeneous rates of convergence to steady-state.