Optimal Dynamic Spatial Policy

We study optimal transfer policy in dynamic spatial equilibrium models with frictional migration and incomplete financial markets. A key policy trade-off is to provide consumption insurance while minimizing the distortion of migration flows. We derive a recursive formula for the optimal spatial transfers that strikes this balance. We calibrate our model to U.S. states and find that the U.S. economy would benefit by increasing transfers to low-income-growth states. Welfare gains from optimal transfers are substantial but smaller than the framework abstracting from slow migration adjustment.

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