MAR 3O0 218 February 2018 LIBRARIES @ Gregory Howard, MMXVIII
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Essays on the Interactions of Local Economies and their Macroeconomic Implications by Gregory Howard B.S. Mathematics, with a second major in Economics, University of North Carolina at Chapel Hill (2010) Submitted to the Department of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics MASSACHUSETTS INSTITUTE OF TECHNOLOGY at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY MAR 3O0 218 February 2018 LIBRARIES @ Gregory Howard, MMXVIII. All rights reserved. ARCIVE4 The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Author....... ...................... C/ Vi Department of Economics -~ A October 14, 2017 Certified by ......... ......... .. ... .. ....... ... .. Ivin Werning Professor of Economics Thesis Supervisor Certified by.... ............................. Arnaud Costinot Professor of Economics , Thesis Supervisor Accepted by ........... ................... ..... Ricardo Caballero Ford International Professor of Economics Chairman, Departmental Committee on Graduate Studies 77 Massachusetts Avenue Cambridge, MA 02139 MITLibraries http://Iibraries.mit.edu/ask DISCLAIMER NOTICE Due to the condition of the original material, there are unavoidable flaws in this reproduction. We have made every effort possible to provide you with the best copy available. Thank you. The images contained in this document are of the best quality available. 2 Essays on the Interactions of Local Economies and their Macroeconomic Implications by Gregory Howard Submitted to the Department of Economics on October 14, 2017, in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics Abstract This thesis consists of three chapters about the spatial aspects of macroeconomics. Chapter 1 argues that local labor demand shocks are amplified by migration. I document that within-U.S. migration causes a large reduction in the unemployment rate of the receiving city, over several years. To establish the causal effect of inmigration, I construct a plausibly exogenous shock by using the outmigration of other places and predicting its destination based on historical patterns. Next, I document that the increase in the demand for housing explains the boom, through two channels. The construction channel occurs because housing is a durable good: hence there is a surge in the number of new houses and construction jobs. The house price channel occurs because the migrants' housing demand drives up prices, leading to increased borrowing and higher non-tradable labor demand. Last, I estimate that these effects imply that endogenous migration amplifies other shocks by 20 percent. Chapter 2, which is joint with Jack Liebersohn, estimates that between 20 and 40 percent of the overall rise in real house prices during the 2000-2006 U.S. housing boom can be attributed to an increase in the relative desirability of inelastic-housing-supply areas. First, we show local housing demand is significantly driven by population changes and changing relative desirability. We develop a theory for why an increase in the relative desirability of inelastic areas would raise house prices nationally. Finally, we quantify the total effect by creating a new measure of housing supply elasticity that covers the entire United States. We show that the decline in manufacturing and the fall in interest rates both played an important role through this geography channel. Chapter 3 documents that shifts in the geographic distribution of economic activity are more frequent around recessions. This effect is more pronounced in professions with greater nominal wage rigidity. As a possible explanation, I develop a new mechanism for equilibrium switching during recessions in a model of agglomeration using downwardly sticky wages. In a dynamic setting, the model requires a sufficiently large shock to switch equilibria. Within the model, place-specific time-specific firm subsidies can be welfare enhancing. Thesis Supervisor: Ivdn Werning Title: Professor of Economics Thesis Supervisor: Arnaud Costinot Title: Professor of Economics 3 4 Acknowledgments This thesis would not have been written without the guidance and help of so many. First, I would like to thank my advisors Ivan Werning, Arnaud Costinot, and David Autor. Each of these professors put in so many hours into helping me become a better researcher. I learned a lot by following their example, and I also learned a lot from them telling me how I needed to improve. With Ivhn, I have fond memories of outdoor reading groups, enjoying the Boston summer weather. I remember, less fondly, weekends in the office as he helped refine some of my ideas. And I am especially grateful that he took it upon himself to read up on an entire literature when my thesis turned from primarily theoretical to entirely empirical. Moving from Cambridge, I will also miss getting to play tennis with him. With Arnaud, I am grateful for the trade tea, his diligent reading of my work, and his willingness to help. He always was able to show me how to clearly think about things that befuddled me. With David, I am grateful for him taking me on as a student late in my graduate career, as I realized my interests were more empirical. He was excellent at making my writing more pithy and clear. And he had many good suggestions that came from a different perspective. In addition to these three, I am thankful to the entire MIT faculty for all their help and guidance over the last five years. MIT Economics is a special department, and every faculty member with whom I interacted contributed to that culture. I am especially grateful to Alp Simsek, David Atkin, Frank Schilbach, and Daron Acemoglu. I would like to thank my classmates. I benefited tremendously from being able to chat with them about my work, and I have formed some life-long friendships because of it. In particular, I'd like to acknowledge Matt Lowe, Arianna Ornaghi, Ludwig Straub, Vivek Bhattacharya, Sebastian Fanelli, Jack Liebersohn, Yu Shi, Ernest Liu, Ben Roth, Dan Green, Ben Yost, Matt Rognlie, Adrien Auclert, Rodrigo Adao, Dejanir Silva, Rachael Meager, Nick Hagerty, Peter Hull, Elizabeth Setren, Donghee Jo, Yuhei Miyauchi, John Firth, Tite Yokossi, and Scott Nelson. Of course, I also owe a great debt to those that helped me along the way, even before I came to MIT. So I would also like to thank my mentors over the years: Tarhan Feyzioglu at the IMF, Lisa Ryu at the FDIC, Sue Goodman in the math department at UNC, Richard Froyen in the economics department at UNC, Beth Anne Wilson at the Fed, Rob Martin at the Fed, and many others along the way. I would not be who I am today without these men and women. Of all the things I am thankful to my parents for, my academic success is only a fraction. But I certainly am thankful for the values and habits that they passed down to me. Even if she insists it was not intentional, my mom got me interested in economics from a young age. I admire her for her work, and if I ever need motivation for doing economics, I can remember how her expertise benefited the country and the world during some very scary times. I would also like to thank my sister Kim for her encouragement and for always being there for me. A few friends in particular helped me stay sane during graduate school, through hiking, playing tennis, watching UNC basketball or Downton Abbey, traveling, praying, and just living life in community. Thank you to Michael and Shannon Poor, Andy and Emily Stuntz, Eric Esch, Dan and Ellie Chamberlain-Stoltzfus, Jahan Mohiuddin, Dan Reich, Annelise Mesler, Chris and Laura Martin, Frederick Wagner, Laura Doherty, Bethany Wagner, Eric Toler and Lauren Teegarden, Wilson and Anna Boardman, Anna Wargula, Leif and Katie Jentoft, Ryan and Abigail Zhang, Zac and Joanna Brooks, Rosemary Boyle, Rick Downs, and Nathan Barczi. I am also blessed to have a wonderful woman in my life, who I am excited to be marrying soon. Thank you, Heather, for your support and love. 5 6 Contents 1 The Migration Accelerator: Labor Mobility, Housing, and Aggregate Demand 17 1.1 Introduction ........................................ 18 1.2 Framework ........................................ 20 1.2.1 H ousing .... ........................... ....... 21 1.3 Empirics I: The Expansionary Effect of Migration ........... ........ 23 1.3.1 D ata ............ .......................... .. 23 1.3.2 Identifying Inmigration Shocks ....................... .. 25 1.3.3 Econometric Specification ..................... ....... 27 1.3.4 The Effect on Unemployment .......................... 28 1.3.5 Threats to Identification ................ ............. 32 1.4 Empirics II: The Housing Channels ........................... 34 1.4.1 Construction Channel ............ .................. 34 1.4.2 House Price Channel ........ ....................... 35 1.4.3 Cross-Sectional Heterogeneity ........................ .. 36 1.4.4 The Housing Channels during the Mariel Boatlift ............... 39 1.4.5 Other Channels ........................... ....... 41 1.5 Counterfactual: The Migration Accelerator ...................... 43 1.5.1 Migration's Response to Labor Demand .................... 44 1.5.2 Accelerator ....................... ............. 45 1.6 Conclusion ....................................... .. 48 2 The Geography Channel of House Price Appreciation: Did the Decline in Man- ufacturing Cause the Housing Boom? 49 2.1 Introduction