Working Paper: Regional Business Cycle Accounting and The Great Recession
Abstract: I extend the business cycle accounting methodology to a setting of a monetary union. I create a novel dataset on prices, wages, employment, net assets, and consumption that using both aggregate and regional data allows for the application of the methodology at three different levels of geographic aggregation: states, MSAs, and counties. Applied to the Great Recession at the state level, the business cycle accounting exercise provides two main findings. First, for 40 out of 48 states the labor wedge played a primary role in accounting for the differences between employment at the state level and employment at the aggregate level. Second, for 42 states the intertemporal wedge played a prominent role in accounting for the differences between consumption at the state level and consumption at the aggregate level. These results suggest that models using regional variation to study the business cycle of the Great Recession would need mechanisms generating fluctuations in more than one wedge to account for relative fluctuations in employment and consumption of a given region; however, in principle, such mechanisms need not be different for different regions.