The Synchronization of US Regional Business Cycles : Evidence from Retail Sales, 1919–62

Despite its central importance in the optimal currency area literature, little is known about when and why US regional business cycles became more synchronized. We shed light on these issues by (re)constructing a monthly index of retail sales for the 12 US Federal Reserve districts from 1919 to 1962, which for the first time allows the study of the synchronization of US regional cycles before and after the major reforms associated with the New Deal and World War II. We find that synchronization increased substantially in the 1930s and has since remained high. We argue that changes in regional industry structures and migration rates across regions cannot account for the increase in synchronization. In contrast, we find a strong relationship with changes in regional financial fragmentation and with the increase in interregional fiscal transfers