Dynamic Spatial General Equilibrium
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.
We are grateful to Princeton University for research support. A previous version of this paper circulated under the title “Sufficient Statistics for Dynamic Spatial Economics.” We would like to thank conference and seminar participants at Dartmouth, Hong Kong, NBER, Nottingham and Princeton for helpful comments. We are also grateful to Andrew Cassey, Fariha Kamal, Martha Loewe, Youngjin Song and Abigail Wozniak for their help with data. We would like to thank Maximilian Schwarz for excellent research assistance. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.