A computable general equilibrium analysis of regional impacts of macro-shocks in the 1980S

The purpose of this study is assess the domestic regional impacts of changes in federal fiscal policies and the nation's trade deficit. An attempt is made to fill a gap in the literature of regional economics by providing an explanation of how economic changes at national and international levels are transmitted to regions, and by providing general-equilibrium estimates of the effects of these changes. The level of regional economic activity is assumed to be linked to the federal budget through federal purchases of goods and services, through intergovernmental transfers, and through net transfers to households. Domestic regions are linked to the balance of trade through shifts in exports and imports and through shifts in net income transfers from abroad.

An interregional computable general equilibrium (CGE) model is constructed and calibrated for Virginia and the rest of the United States (ROUS). Scenarios approximating federal fiscal policies and the trade deficit during the period 1981-85 are introduced, and the model is solved to obtain a new equilibrium. As a result of these shocks, it is concluded: (a) that the magnitude of sectoral effects differed in Virginia versus ROUS, (b) that in contrast to non-rural sectors, rural sectors in Virginia experienced slower growth in value added, (c) that investment in Virginia and in ROUS increased in response to the net inflow of savings from abroad, but the increase was mitigated by the rise in federal spending, and (d) that a tariff increase on the output of the apparel and textile industry would increase output in that industry in Virginia but would decrease it in other industries if the economy were fully employed.