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Macroeconomic Implications of Agglomeration

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  • Toni M. Whited

    (University of Rochester)

  • Jonas D.M. Fisher

    (Chicago Fed)

  • Morris A. Davis

    (University of Wisconsin)

Abstract

We construct a dynamic general equilibrium model of cities and use it to estimate the effect of local agglomeration on per capita consumption growth. Agglomeration affects growth through the density of economic activity: higher production per unit of land raises local productivity. Firms take productivity as given; produce using a technology that has constant returns in developed land, capital, and labor; and accumulate land and capital. If land prices are rising, as they are empirically, firms economize on land. This behavior increases density and contributes to growth. We use a panel of U.S. cities and our model's predicted relationship among wages, output prices, housing rents, and labor quality to estimate the net e®ect of agglomeration on local wages. The impact of agglomeration on the level of wages is estimated to be 2 percent. Combined with our model and observed increases in land prices, this estimate implies that agglomeration raises per capita consumption growth by 10 percent.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1330.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1330

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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References

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  1. Macroeconomic implications of agglomeration
    by Christian Zimmermann in NEP-DGE blog on 2010-02-22 01:36:12
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Cited by:
  1. Eeckhout, Jan & Pinheiro, Roberto & Schmidheiny, Kurt, 2010. "Spatial Sorting: Why New York, Los Angeles and Detroit attract the greatest minds as well as the unskilled," CEPR Discussion Papers 8151, C.E.P.R. Discussion Papers.
  2. Gerald A. Carlino, 2011. "Three keys to the city: resources, agglomeration economies, and sorting," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 1-13.
  3. Davis, Morris A. & Fisher, Jonas D. M. & Veracierto, Marcelo, 2013. "Gross Migration, Housing and Urban Population Dynamics," Working Paper Series WP-2013-19, Federal Reserve Bank of Chicago.
  4. Jeffrey Lin, 2011. "Urban productivity advantages from job search and matching," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 9-16.

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