In this paper, we provide novel evidence on the contemporaneous and persistent effects of regional policy. We apply a quasi-experimental identification strategy exploiting the fact that municipalities in the West-German Zonenrandgebiet (ZRG) were eligible for substantial regional transfers between 1971 and 1994. The ZRG was an approximately 40km-band adjacent to the Iron Curtain during the Cold War in West Germany. Apart from determining transfer eligibility, this pure geographic threshold did not have any institutional, cultural or economic relevance. We use regression discontinuity to estimate the causal effects of regional policy on local economic activity. Using disaggregated data on the municipality level and satellite night-light data (as a proxy for GDP), we find that the ZRG treatment induced a significant and persistent shift of activity towards the recipient regions. Income per km^2 of recipient municipalities increased by about 55 percent during the times of the program and the effect remained stable at more than 40 percent in 2010. We also examine potential channels finding strong contemporaneous and persistent effects of transfers on population density and the business tax base. Our results thus provide evidence for a lasting impact of regional transfers on the spatial equilibrium which suggests that market externalities are an important explanation of the spatial distribution of economic activity.