Market Potential, panel data, and aggregate fluctuations: All that glitters is not gold

Bruna, Fernando (2024): Market Potential, panel data, and aggregate fluctuations: All that glitters is not gold.

Abstract

The New Economic Geography (NEG) provides a historical explanation for the spatial agglomeration of economic activity. One of its predictions, the ‘wage equation’, relates regional income to market accessibility. Although the NEG is a long-term theory, empirical literature has tested it using panel data methods, which capture short-term relation-ships between temporal changes in variables. For a sample of European regions, I show that panel data estimations of the wage equation identify only potential spillover effects of the European business cycle on the synchronic evolution of regional per capita income. That is, the panel data results are not due to the mechanisms proposed by the NEG. The paper concludes with a cautionary note about misinterpretation of panel data estimations.

• Item Type: MPRA Paper
• Language: English
• Keywords: NEG, agglomeration, wage equation, fixed effects, first differences, European cycle
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C18 - Methodological Issues: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity

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