The Moynihan Institute’s Trade\, Developmen t and Political Economy program presents Trevor Tombe.
Reg ional economies within countries are integrated through trade\, migration and financial flows. As a consequence\, shocks to one region or sector aff ect many others in ways that either dampen or amplify the effect on the na tional economy.
Building on a large and growing literat ure on regional trade and migration\, I quantify how such integration can affect aggregate productivity levels and volatility. To do this\, I combin e detailed data on internal trade\, migration\, and government financial f lows across Canadian provinces and sectors with a rich yet tractable model of Canada’s economy.
Simulating changes in provincial and sectoral productivity to match observed volatility\, I find migration flows tend to substantially amplify the national effect of local shocks. S pecifically\, overall volatility in Canada’s economy may be nearly 50 perc ent higher due to inter-provincial migration alone. Federal transfers — th rough budgetary revenue and expenditures that are responsive to regional e conomic circumstances — significantly dampen this effect by roughly one qu arter. But such transfers come at the cost of lower aggregate productivity .
I find Canada’s current fiscal transfers may lower na
tional real GDP per capita by between 0.6 and 2.1 percent. These results u
ncover a meaningful trade-off between aggregate economic volatility and pr
oductivity levels created by how central government finances interact with
internal trade and migration.
Trevor Tombe is a pr ofessor of economics at the University of Calgary and a research fellow at The School of Public Policy. He is also co-director of Finances of the Na tion. His academic research explores a broad range of topics\, but focuses mainly on international trade\, macroeconomics and fiscal federalism. In addition to this work\, he actively contributes to public policy research and outreach in Alberta and Canada.
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