How Large Do Multi-Region Models Need to Be?

Given the connectedness of most states with their neighbors, any economic analysis of changes in a state's policy needs to account for the interdependence between states. We examine in how much detail one needs to model the factor and commodity flows between states, and how much, if anything, is lost in the aggregation of neighboring states into larger regions. We develop nine dynamic multi-region general equilibrium models of the United States, with different aggregations of states (a two-region model, a 7-region model, and a full 51-region model) and different assumptions regarding intermediate inputs. We examine the same policy change with these nine models, and find that all nine models suggest very similar economic effects of the policy change in the first year. Our overall conclusion is that the policy implications that one might draw from small and highly aggregate models are fairly robust