By Benny Kleinman, Ernest Liu and Stephen Redding
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 re-allocation 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.
Many moons ago I tried to develop a spacial dynamic general equilibrium to study the diffusion of inflation, and the considerable lag from shock to inflation change. I got hopelessly lost in the complexities. I am glad to see that this kind of work looks feasible now.