From Lorenzo Caliendo, Fernando Parro, Esteban Rossi-Hansberg, and Pierre-Daniel Sarte:
We study the impact of regional and sectoral productivity changes on the U.S. economy. To that end, we consider an environment that captures the effects of interregional and intersectoral trade in propagating disaggregated productivity changes at the level of a sector in a given U.S. state to the rest of the economy. The quantitative model we develop features pairwise interregional trade across all 50 U.S. states, 26 traded and non-traded industries, labor as a mobile factor, and structures and land as an immobile factor. We allow for sectoral linkages in the form of an intermediate input structure that matches the U.S. input-output matrix. Using data on trade flows by industry between states, as well as other regional and industry data, we calibrate the model and carry out a variety of counterfactual experiments that allow us to gauge the impact of regional and sectoral productivity changes. We find that such changes can have dramatically different effects depending on the sectors and regions affected. In extreme cases, increases in productivity can have negative effects on real GDP (although welfare effects remain positive).