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Does a Federal Country Need Federal Transferences when it has Labour Mobility?

Author

Listed:
  • Tiago Neves Sequeira

    (UBI and INOVA)

  • Alexandra Ferreira-Lopes

    (ISCTE - Department of Economics, UNIDE-ERC and DINÂMIA)

Abstract

In this work we empirically test optimum currency area theory regarding the efficiency of two usual stabilization mechanisms for members of a given monetary union (the United States): federal transfers and migration. The US is recognized as a country where labor mobility between states is high. Despite of this flexibility in the labor market, the Federal Budget still grants some significant amount of funding to the states. Does the country need these two stabilization mechanisms to achieve cyclical convergence between the states? In this paper we jointly assess the consequences of having federal transfers and labor mobility in terms of the states' cyclical output. We conclude that federal transfers undoubtedly contribute to increase cyclical output. However, outmigration may increase or decrease cyclical output, depending on certain conditions. As federal transfers proved to be much more important than migration, the answer to the question in the title is `yes'.

Suggested Citation

  • Tiago Neves Sequeira & Alexandra Ferreira-Lopes, 2008. "Does a Federal Country Need Federal Transferences when it has Labour Mobility?," Working Papers Series 1 ercwp0708, ISCTE-IUL, Business Research Unit (BRU-IUL).
    • Handle: RePEc:isc:iscwp1:ercwp0708
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    File URL: http://bru-unide.iscte.pt/RePEc/pdfs/ERCwp0708.pdf
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    More about this item

    Keywords

    Internal Migration; Federal Transfers; Cyclical Convergence; Panel Data; GMM.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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