Regional Contributions to Macroeconomic Models

After the failure of most macroeconomic models to forecast and interpret the Great Recession of 2008-2010, a great deal of introspection about the suitability of the models employed resulted in the Rebuilding Macroeconomic Theory Project (RMTP). While attention was directed to agent heterogeneity, no reference was made to the potential contribution of regional/spatial heterogeneity. This paper explores some recent work that has highlighted a number of dimensions where the spatial heterogeneity is evident – in business cycles, value chains, and income flows – and also provides evidence of important spillover effects. However, these analyses have not been linked to macroeconomic models to test the importance of this dimension of heterogeneity that has been overlooked. While many regional impact and forecasting models use national models to provide exogenous inputs, there is rarely a feedback from the regional level to the national level. This is a potentially valuable and critical opportunity for regional science to demonstrate its importance in understanding the structure and functioning of national economic systems.