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One for Some or One for All? Taylor Rules and Interregional Heterogeneity

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Author Info

  • Olivier Coibion

    ()
    (Department of Economics, College of William and Mary)

  • Daniel Goldstein

    ()
    (Department of Economics, Pennsylvania State University)

Abstract

We document a novel empirical phenomenon: the U.S. Federal Reserve appears to set interest rates partly in response to regional economic disparities. This result is remarkably robust even after controlling for a wide variety of factors, including the central bank’s information set and a battery of explanatory variables. We argue that this finding likely does not reflect an explicit concern about regional differences on the part of policymakers but instead can be explained by a model with non-linear regional Phillips curves. Consistent with the predictions of this model, we find that the Federal Reserve responds disproportionately to fluctuations in low unemployment states. Alternative explanations based on differential effects of monetary policy across regions or regional preferences on the part of voting members of the FOMC cannot account for this finding.

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Bibliographic Info

Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 58.

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Length: 38 pages
Date of creation: 11 Sep 2007
Date of revision: 19 Sep 2011
Handle: RePEc:cwm:wpaper:58

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Keywords: Regional Heterogeneity; Monetary Policy; Taylor Rules;

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  1. Friedrich Heinemann & Felix P. Huefner, 2004. "Is The View From The Eurotower Purely European? - National Divergence And Ecb Interest Rate Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(4), pages 544-558, 09.
  2. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
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