The Aggregate Implications of Regional Business Cycles

Abstract

Louis Federal Reserve, UCLA, Yale's Cowles Conference on Macroeconomics. Any remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Housing bust, bank lending & employment: Evidence from multimarket banks

“…With mobile labor or flexible interest rates, job losses in one region may facilitate job growth in other regions, causing regional elasticities to overstate aggregate effects. In the model of Beraja et al (2016), regional elasticities to a discount rate shock are 2.3 times that of an aggregate shock. This would imply that falling house prices reduced employment by 1.5% in aggregate instead of 3.5%.…”

“…Combined with the average exposure to falling house prices and construction declines, this results in expected employment declines of 1.6% in the house price specification, and 1.7% in the construction specification. 33 If the Federal Reserve's unconventional monetary policy operations were successful enough that general equilibrium effects estimated by Beraja et al (2016) still held at the zero lower bound, this would further dampen the effects by a factor of 2.3. Thus the conservatively estimated decline in employment due to real estate shocks would be between 70 and 73 basis points.…”

“…Thus with moderately flexible wages, a credit shock might have a negligible impact on tradable employment. This makes it important to understand if wages respond to local demand shocks as argued by Beraja et al (2016), or if they are largely non-responsive as in Mian and Sufi (2014).…”

“…However, since there are reasons to believe that the local average treatment effects would exceed the average treatment effect, the OLS coefficient is likely more appropriate for this exercise. The inclusion of the endogenous county control may bias the coefficient against finding a large effect, but this is presumably less important than the bias in the opposite direction from not controlling for local shocks.30 When monetary policy doesn't respond to shocks,Beraja et al (2016) find that regional and aggregate elasticities are similar. Thus, the back of the envelope calculations may actually not be far off.…”

Regional Effects of Exchange Rate Fluctuations

“…Finally, our paper speaks to a growing literature in macroeconomics that has emphasized regional variation to macro‐economic shocks in monetary unions. While HPT focuses on European countries, Beraja, Hurst, and Ospina (2019), Nakamura and Steinsson (2014), and Dupor et al. (2018) have studied the consequences of regional fluctuations for both regional and aggregate business cycles in the United States.…”