Government-financed health care (GFHC) expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.6 percent of national personal income over the past 50 years. Recently, some analysts (e.g., the Council of Economics Advisers (2014)) have argued that an expansion of GFHC (in particular Medicaid) has large positive employment effects. Using quarterly data for 1978:Q2-2016:Q4, this paper estimates the impact of GFHC spending on prime-age employment using an instrumental variables strategy that exploits exogenous variation in Medicare spending. Our IV estimate of the multiplier suggests that an increase in GFHC spending equal to 1 percent of income over a two year horizon causes the employment-population ratio to increase by 58 basis points. This implies a job-creation cost of $84,900 per job year. Medicare spending changes by themselves yield a similar estimate of the employment multiplier (0.65). We then explore the dynamic employment response accumulated up to a four-year horizon and estimate a job-creation cost in the range of $406,000 to $467,000 per job-year. In other words, we find that an exogenous GFHC expansion has a moderate positive employment response in the short run and a muted cumulative response in the long run. We also show that the so-called relative (or local) multiplier approach based on the state-level panel provides similar estimates to those based on aggregate data. Although the employment effects using aggregate data are estimated imprecisely, they are considerably sharper when estimated using state-level data.
{"title":"The Aggregate and Relative Economic Effects of Government Financed Health Care","authors":"Bill Dupor, Guerrero Rodrigo","doi":"10.20955/wp.2017.027","DOIUrl":"https://doi.org/10.20955/wp.2017.027","url":null,"abstract":"Government-financed health care (GFHC) expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.6 percent of national personal income over the past 50 years. Recently, some analysts (e.g., the Council of Economics Advisers (2014)) have argued that an expansion of GFHC (in particular Medicaid) has large positive employment effects. Using quarterly data for 1978:Q2-2016:Q4, this paper estimates the impact of GFHC spending on prime-age employment using an instrumental variables strategy that exploits exogenous variation in Medicare spending. Our IV estimate of the multiplier suggests that an increase in GFHC spending equal to 1 percent of income over a two year horizon causes the employment-population ratio to increase by 58 basis points. This implies a job-creation cost of $84,900 per job year. Medicare spending changes by themselves yield a similar estimate of the employment multiplier (0.65). We then explore the dynamic employment response accumulated up to a four-year horizon and estimate a job-creation cost in the range of $406,000 to $467,000 per job-year. In other words, we find that an exogenous GFHC expansion has a moderate positive employment response in the short run and a muted cumulative response in the long run. We also show that the so-called relative (or local) multiplier approach based on the state-level panel provides similar estimates to those based on aggregate data. Although the employment effects using aggregate data are estimated imprecisely, they are considerably sharper when estimated using state-level data.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"140 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77689366","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show that a monetary policy rule that uses the exchange rate to stabilize the economy outperforms a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the path of the nominal exchange rate and interest rate under each rule, and (ii) time variation in the risk premium, which leads to deviations from uncovered interest parity. These differences are larger in very open economies, more exposed to foreign shocks, and in which domestic and foreign goods are highly substitutable.
{"title":"Managing Macroeconomic Fluctuations with Flexible Exchange Rate Targeting","authors":"Jonas Heipertz, I. Mihov, Ana Maria Santacreu","doi":"10.20955/wp.2017.028","DOIUrl":"https://doi.org/10.20955/wp.2017.028","url":null,"abstract":"We show that a monetary policy rule that uses the exchange rate to stabilize the economy outperforms a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the path of the nominal exchange rate and interest rate under each rule, and (ii) time variation in the risk premium, which leads to deviations from uncovered interest parity. These differences are larger in very open economies, more exposed to foreign shocks, and in which domestic and foreign goods are highly substitutable.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"46 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82688424","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many models in the business cycle literature generate counter-cyclical price markups. This paper examines if the prominent models in the literature are consistent with the empirical findings of micro-level markup behavior in Hong (2016). In particular, I test the markup behavior of the following two models: (i) an oligopolistic competition model, and (ii) a New Keynesian model with heterogeneous price stickiness. First, I explore the Atkeson and Burstein (2008) model of oligopolistic competition, in which markups are an increasing function of firm market shares. Coupled with an exogenous uncertainty shock as in Bloom (2009), i.e. a second-moment shock to firm productivities in recessions, this model results in a countercyclical average markup, as in the data. However, in contrast with the data, this model predicts that smaller firms reduce their markups. Second, I calibrate both Calvo and menu cost models of price stickiness to match the empirical heterogeneity in price durations across small and large firms, as in Goldberg and Hellerstein (2011). I find that both models can match the average counter-cyclicality of markups in response to monetary shocks. Furthermore, since small firms adjust prices less frequently, they exhibit greater markup counter-cyclicality, consistent with the empirical patterns. Quantitatively, however, only the menu cost model, through its selection effect, can match the extent of the empirical heterogeneity in markup cyclicality. In addition, both sticky price models imply pro-cyclical markup behavior in response to productivity shocks.
{"title":"Markup Cyclicality: A Tale of Two Models","authors":"Sungki Hong","doi":"10.20955/wp.2017.034","DOIUrl":"https://doi.org/10.20955/wp.2017.034","url":null,"abstract":"Many models in the business cycle literature generate counter-cyclical price markups. This paper examines if the prominent models in the literature are consistent with the empirical findings of micro-level markup behavior in Hong (2016). In particular, I test the markup behavior of the following two models: (i) an oligopolistic competition model, and (ii) a New Keynesian model with heterogeneous price stickiness. First, I explore the Atkeson and Burstein (2008) model of oligopolistic competition, in which markups are an increasing function of firm market shares. Coupled with an exogenous uncertainty shock as in Bloom (2009), i.e. a second-moment shock to firm productivities in recessions, this model results in a countercyclical average markup, as in the data. However, in contrast with the data, this model predicts that smaller firms reduce their markups. Second, I calibrate both Calvo and menu cost models of price stickiness to match the empirical heterogeneity in price durations across small and large firms, as in Goldberg and Hellerstein (2011). I find that both models can match the average counter-cyclicality of markups in response to monetary shocks. Furthermore, since small firms adjust prices less frequently, they exhibit greater markup counter-cyclicality, consistent with the empirical patterns. Quantitatively, however, only the menu cost model, through its selection effect, can match the extent of the empirical heterogeneity in markup cyclicality. In addition, both sticky price models imply pro-cyclical markup behavior in response to productivity shocks.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"158 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80032207","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.
{"title":"Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level","authors":"Aleksander Berentsen, Christopher J. Waller","doi":"10.20955/wp.2017.008","DOIUrl":"https://doi.org/10.20955/wp.2017.008","url":null,"abstract":"We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"4 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87038639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large pri- vate sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nom- inal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supply- ing their desired amount of labor, a type of divine coincidence result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an ex- tension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.
{"title":"Nominal GDP Targeting with Heterogeneous Labor Supply","authors":"J. Bullard, Aarti Singh","doi":"10.20955/wp.2017.016","DOIUrl":"https://doi.org/10.20955/wp.2017.016","url":null,"abstract":"We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large pri- vate sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nom- inal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supply- ing their desired amount of labor, a type of divine coincidence result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an ex- tension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"21 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-02-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77531234","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
What is the prescription of Ramsey capital taxes for the heterogeneous-agent incomplete-market economy in the long run? Aiyagari (1995) addressed the question, showing that a positive capital tax should be imposed to implement the steady-state allocation that satisfies the so-called modified golden rule. In his analysis of the Ramsey problem, a critical assumption implicitly made is the existence of steady-state allocations at the optimum. This paper revisits the issue and finds sharply different results. We demonstrate that the optimal Ramsey allocation may feature no steady state. The key to our results is embedded in the hallmark of incomplete-market models that the risk-free rate is lower than the time discount rate at the steady state in competitive equilibrium.
{"title":"Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited","authors":"Yunmin Chen, YiLi Chien, C.C. Yang","doi":"10.20955/wp.2017.003","DOIUrl":"https://doi.org/10.20955/wp.2017.003","url":null,"abstract":"What is the prescription of Ramsey capital taxes for the heterogeneous-agent incomplete-market economy in the long run? Aiyagari (1995) addressed the question, showing that a positive capital tax should be imposed to implement the steady-state allocation that satisfies the so-called modified golden rule. In his analysis of the Ramsey problem, a critical assumption implicitly made is the existence of steady-state allocations at the optimum. This paper revisits the issue and finds sharply different results. We demonstrate that the optimal Ramsey allocation may feature no steady state. The key to our results is embedded in the hallmark of incomplete-market models that the risk-free rate is lower than the time discount rate at the steady state in competitive equilibrium.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"54 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88170452","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Race and ethnic wealth differentials are wide and increasing. Some of the gaps are associated with education differences, but education alone cannot account for the substantially higher net worth of White families than of Black and Hispanic families. As of 2013, the median wealth of Black college graduate families had fallen to only 13 percent of the median wealth of White families. One possible explanation is the significantly lower shares of married couple and married parent households among minorities. For example, even among college graduates, only 41 percent of Black family heads were married, compared with 68 percent of White family heads. Did these trends in family status contribute significantly to differences between Whites, Blacks, and Hispanics in the declines in wealth among college graduates? The author finds that family status changes between 2007 and 2013 were too small to play a large role and even married couple families among Blacks and Hispanics suffered sharp declines in home equity and net worth. Still, married couples retained at least a 70 percent advantage over the unmarried groups.
{"title":"Do Family Structure Differences Explain Trends in Wealth Differentials?","authors":"R. Lerman","doi":"10.20955/r.2017.85-101","DOIUrl":"https://doi.org/10.20955/r.2017.85-101","url":null,"abstract":"Race and ethnic wealth differentials are wide and increasing. Some of the gaps are associated with education differences, but education alone cannot account for the substantially higher net worth of White families than of Black and Hispanic families. As of 2013, the median wealth of Black college graduate families had fallen to only 13 percent of the median wealth of White families. One possible explanation is the significantly lower shares of married couple and married parent households among minorities. For example, even among college graduates, only 41 percent of Black family heads were married, compared with 68 percent of White family heads. Did these trends in family status contribute significantly to differences between Whites, Blacks, and Hispanics in the declines in wealth among college graduates? The author finds that family status changes between 2007 and 2013 were too small to play a large role and even married couple families among Blacks and Hispanics suffered sharp declines in home equity and net worth. Still, married couples retained at least a 70 percent advantage over the unmarried groups.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"32 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2017-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79105419","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
P. Ferreira, A. Monge-Naranjo, Luciene Torres de Mello Pereira
The emergence of slums is a common feature in a country's path towards urbanization, structural transformation and development. Based on salient micro and macro evidence of Brazilian labor, housing and education markets, we construct a simple model to examine the conditions for slums to emerge. We then use the model to examine whether slums are barriers or stepping stones for lower skilled households and for the development of the country as a whole. We calibrate our model to explore the dynamic interaction between skill formation, income inequality and structural transformation with the rise (and potential fall) of slums in Brazil. We then conduct policy counterfactuals. For instance, we find that cracking down on slums could slow down the acquisition of human capital, the growth of cities (outside slums) and non-agricultural employment. The impact of reducing housing barriers to entry into cities and of different forms of school integration between the city and the slums is also explored.
{"title":"Of Cities and Slums","authors":"P. Ferreira, A. Monge-Naranjo, Luciene Torres de Mello Pereira","doi":"10.20955/wp.2016.022","DOIUrl":"https://doi.org/10.20955/wp.2016.022","url":null,"abstract":"The emergence of slums is a common feature in a country's path towards urbanization, structural transformation and development. Based on salient micro and macro evidence of Brazilian labor, housing and education markets, we construct a simple model to examine the conditions for slums to emerge. We then use the model to examine whether slums are barriers or stepping stones for lower skilled households and for the development of the country as a whole. We calibrate our model to explore the dynamic interaction between skill formation, income inequality and structural transformation with the rise (and potential fall) of slums in Brazil. We then conduct policy counterfactuals. For instance, we find that cracking down on slums could slow down the acquisition of human capital, the growth of cities (outside slums) and non-agricultural employment. The impact of reducing housing barriers to entry into cities and of different forms of school integration between the city and the slums is also explored.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"54 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2016-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79815109","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During the housing bust many homeowners found themselves “underwater”—the amount they owed on their mortgages exceeded the value of the associated property—and they either could not or possibly chose not to stay current on their mortgage payments. As a consequence, sales of so-called distressed properties, often after a foreclosure, became commonplace. This spurred numerous research papers on various related issues. The authors’ review summarizes the research findings on three topics: the impact of changes in housing prices on foreclosures; the impact of foreclosure on the sales price of the foreclosed house; and the impact of foreclosure on the sales prices of nearby houses. Not surprisingly, declining housing prices are associated with increasing foreclosure rates; however, various other factors, such as a job loss or expected housing prices, can also play an important role. This review highlights various theoretical and econometric issues that have raised doubts about the accuracy of estimated price impacts of foreclosures and led to numerous refinements of the subsequent empirical analysis. Estimates of the own foreclosure discount generally range from near zero to 28 percent, with most estimates greater than 12 percent. Estimates of the discount resulting from spillover effects of nearby foreclosed houses are generally less than 2 percent and diminish rapidly with distance.
{"title":"Sales of Distressed Residential Property: What Have We Learned from Recent Research?","authors":"Jeffrey P. Cohen, Cletus C. Coughlin, Vincent Yao","doi":"10.20955/r.2016.159-188","DOIUrl":"https://doi.org/10.20955/r.2016.159-188","url":null,"abstract":"During the housing bust many homeowners found themselves “underwater”—the amount they owed on their mortgages exceeded the value of the associated property—and they either could not or possibly chose not to stay current on their mortgage payments. As a consequence, sales of so-called distressed properties, often after a foreclosure, became commonplace. This spurred numerous research papers on various related issues. The authors’ review summarizes the research findings on three topics: the impact of changes in housing prices on foreclosures; the impact of foreclosure on the sales price of the foreclosed house; and the impact of foreclosure on the sales prices of nearby houses. Not surprisingly, declining housing prices are associated with increasing foreclosure rates; however, various other factors, such as a job loss or expected housing prices, can also play an important role. This review highlights various theoretical and econometric issues that have raised doubts about the accuracy of estimated price impacts of foreclosures and led to numerous refinements of the subsequent empirical analysis. Estimates of the own foreclosure discount generally range from near zero to 28 percent, with most estimates greater than 12 percent. Estimates of the discount resulting from spillover effects of nearby foreclosed houses are generally less than 2 percent and diminish rapidly with distance.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"1 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2016-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88208649","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which initially symmetric micro regions are combined to form aggregated macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that larger countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the relative cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. This mechanism leads to border effect heterogeneity and is independent of multilateral resistance effects in general equilibrium. Even if no border frictions exist at the micro level, gravity estimation on aggregate data can still produce large border effects. We test our theory on domestic and international trade flows at the level of U.S. states. Our results confirm the model's predictions, with quantitatively large effects.
{"title":"Estimating Border Effects: The Impact of Spatial Aggregation","authors":"Cletus C. Coughlin, D. Novy","doi":"10.20955/wp.2016.006","DOIUrl":"https://doi.org/10.20955/wp.2016.006","url":null,"abstract":"Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which initially symmetric micro regions are combined to form aggregated macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that larger countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the relative cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. This mechanism leads to border effect heterogeneity and is independent of multilateral resistance effects in general equilibrium. Even if no border frictions exist at the micro level, gravity estimation on aggregate data can still produce large border effects. We test our theory on domestic and international trade flows at the level of U.S. states. Our results confirm the model's predictions, with quantitatively large effects.","PeriodicalId":51713,"journal":{"name":"Federal Reserve Bank of St Louis Review","volume":"27 1","pages":""},"PeriodicalIF":1.7,"publicationDate":"2016-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91266839","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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