Persistent shocks and incomplete regional adjustment: a model-averaging approach

Abstract

ABSTRACT Two competing paradigms to modelling the impacts of regional economic shocks have arisen: ‘disequilibrium’ models, which predict that regional economies eventually fully recover, and ‘no-equilibrium’ models, which predict economic shocks have a permanent effect. To address this controversy, we adapt contemporary model-averaging methods to optimally combine both paradigms and thereby permit intermediate cases in which recoveries can be partial. Applying our method to a set of labour market models that span the disequilibrium and no-equilibrium paradigms, we find that regional recoveries are incomplete, implying that downturns have long-lasting effects on regional unemployment rates.