International and Intercity Trade, and Housing Prices in US Cities

Abstract

International trade models typically consider countries exchanging goods/services, while urban models often examine the consequences of domestic trade for city structure. Relatively little known research synthesizes these to allow for shocks propagating domestically with both domestic and international trade. One exception is Autor et al. (2013), who examine how Chinese imports impact US domestic labor markets. We consider how city-to-city trade and city international exports impact city Gross Domestic Product (GDP) and housing price growth. We develop a theoretical model of trading cities, domestically and internationally, and explore its empirical predictions. We propose and estimate several empirical models. Using instrumental variables (IV), we identify city-level GDP growth impacts on city house price growth. This first equation follows from imposing spatial equilibrium across cities. The second IV equation examines how international exports from a city, transfers, and domestic shipments impact city-level GDP. We also consider a third set of equations, which explores how economic integration, domestic and international, affects city-level GDP growth. In general, our empirical estimation results confirm the signs/magnitudes predicted by the theory, and imply that labor market shocks in trading cities affect city-level GDP, which in turn impacts housing prices. This theoretical approach, synthesis of city-level data, and empirical analysis are completely novel.