Macroeconomic Implications of Agglomeration

Abstract

Cities exist because of the productivity gains that arise from clustering production and workers, a process called agglomeration. How important is agglomeration for aggregate growth? This paper constructs a dynamic stochastic general equilibrium model of cities and uses it to estimate the effect of local agglomeration on aggregate growth. We combine aggregate time-series and city-level panel data to estimate the model's parameters via generalized method of moments. The estimates imply a statistically and economically significant impact of local agglomeration on the growth rate of per capita consumption, raising it by about 10%. numerous seminar participants, the referees, and the editor for helpful comments. Yunjeen Kim provided outstanding research assistance. The views expressed herein are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Chicago or the Federal Reserve System. 2 We do not prove that this equilibrium is unique, a point we discuss further below.