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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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File URL: http://economics.wm.edu/wp/cwm_wp58rev3.pdf
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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

Contact details of provider:
Postal: P.O. Box 8795, Williamsburg, VA 23187-8795
Phone: (757) 221-4311
Fax: (757) 221-2390
Web page: http://www.wm.edu/economics/
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Related research

Keywords: Regional Heterogeneity; Monetary Policy; Taylor Rules;

Other versions of this item:

Find related papers by JEL classification:

• E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
• E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

This paper has been announced in the following NEP Reports:

• NEP-ALL-2007-09-16 (All new papers)
• NEP-CBA-2007-09-16 (Central Banking)
• NEP-MAC-2007-09-16 (Macroeconomics)
• NEP-MON-2007-09-16 (Monetary Economics)

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1. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
   
   • 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.
2. Huefner, Felix P & Friedrich Heinemann, 2003. "Is the View from the Eurotower Purely European? - National Divergence and ECB Interest Rate Policy," Royal Economic Society Annual Conference 2003 110, Royal Economic Society.
   
   • 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.
   • Heinemann, Friedrich & Huefner, Felix P., 2002. "Is the View from the Eurotower Purely European? National Divergence and ECB Interest Rate Policy," ZEW Discussion Papers 02-69, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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