Growth, Business Cycles, and Policy in U.S. States

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The project examines the economic performance of individual states in the US over time, taking into account business cycle fluctuations. The goal is to answer research questions about how state-level policies affect state-level economic outcomes. The PI plans to create a data set that includes economic aggregate measures for each US state on a quarterly basis. To do this, he will have to combine existing data sets and will have to use statistical methods to impute quarterly values for several key variables that are only reported annually. The quarterly-level data will be available to other researchers. Once he has constructed this data set, he will use statistical analysis to determine the difference between long-run economic trends and the shorter term effects of business cycle fluctuations. This will allow him to compare across states to see how each state performs on growth, the effects of business cycles, and the impact of economic shocks. Finally, he will develop a model of the economic relationship between states in the US using methods that have been used to model trade between countries in the European Union. He will use the data to estimate parameters of his model, and will then use the model to simulate the effects of different kinds of state-level tax policies. The PI will use a variety of methods (including articles written for a general audience) to make the results of this project accessible to voters and legislators. The results of this project will be important in two different ways. First of all, it will provide new evidence for science-based economic policies at the state level. Second, it will help US policymakers understand which state-level experiments in tax policies are worth considering at the federal level. The first goal of the project is to compile and estimate a data set of quarterly state-level economic aggregates. While some of the macroeconomic variables are available on public databases, several key variables are only available at annual frequencies. But for many questions, data at the quarterly frequency (or higher) are needed. The PI will use annual data on the variables of interest, along with other quarterly economic indicators, to estimate quarterly time series for all key state-level macroeconomic indicators.After constructing the data set, he will begin with a less structured analysis of data, using panel VARs to decompose the state-level variables into long-run growth trends and business cycles. The spatial aspects of the data will allow him to analyze state, regional, and aggregate factors, and to trace how shocks hitting one state or region may diffuse to others. In addition, the states have different dynamics and will respond differently to aggregate shocks. Moreover, the trends, dependencies, and dynamics may have changed over time. Estimating and analyzing time-varying panel VARs will provide useful comparisons across states on the commonalities and differences in growth, business cycles, and the impacts of shocks. While the empirical analysis can describe the dynamics of state economies, to study the impact of state-level economic policy, the PI will develop and estimate structural models of the state-level economies. In particular, he will build on small open economy DSGE models of the Euro area, adapting and applying them to study U.S. states. This will allow him to study the impact of state-level tax policy, including the differential effects of different types of state taxes, and strategies for fiscal consolidation.