Events

Dr. Ernest Liu
Assistant Professor of Economics
Princeton University

We model the dynamic response of the spatial economy to shocks to productivity, amenities, trade costs and migration costs in the presence of migration frictions and forward-looking capital investments. We derive closed-form solutions for the first-order general equilibrium response of the economy’s entire transition path to these shocks. Our sufficient statistics depend on four observable trade and migration matrices, the initial values of the state variables in each location (population and the capital stock), and the structural parameters of the model. We show that these sufficient statistics are exact for small shocks and provide a close approximation to the full non-linear model solution for the empirical distribution of shocks. We provide an analytical characterization of the economy’s transition path in terms of an impact matrix, which captures the initial impact of the shocks, and a transition matrix, which governs the subsequent evolution of the state variables. We show that the speed of convergence to the steady-state depends on the eigenvalues of this transition matrix. We implement our approach empirically using data on U.S. states from 1965-2015 and data on U.S. state-sectors from 1999-2015. We find slow average speeds of convergence, with U.S. states much closer to steady-state at the end of our sample period than at the beginning. We use an eigendecomposition of the transition matrix to characterize the heterogeneous impact of local shocks.

This is a joint seminar organized by HKU, CUHK, City U, HKUST and Lingnan U.

Please contact Xiameng PAN at xmpan@connect.hku.hk for registration.