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Abstract

Within a monetary union, regional inflation differentials lead to a competition between the real interest rate and wealth channels on the one hand and the real exchange rate channel on the other hand in the transmission of regional shocks. This may have implications for the length and vehemence of regional business cycles. This paper tries to quantify how these forces work against each other using regional data for the United States. Our estimates indicate that, following an increase in the regional inflation rate, in the short run the pro-cyclical effect through the real interest rate and wealth channels is strongest. After a period of about 3-4 years the cumulative worsening of the competitive position asserts its influence. Regional cycles in the housing market have a clear pro-cyclical effect and are, on their part, affected by regional real interest rates and real growth.

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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 04-13.

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Length: 15 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:use:tkiwps:0413

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Related research

Keywords: monetary union; regional effects; inflation differentials; monetary transmission;

Find related papers by JEL classification:

• E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

This paper has been announced in the following NEP Reports:

• NEP-ALL-2005-10-29 (All new papers)
• NEP-CBA-2005-10-29 (Central Banking)
• NEP-GEO-2005-10-29 (Economic Geography)
• NEP-IFN-2005-10-29 (International Finance)
• NEP-MAC-2005-10-29 (Macroeconomics)
• NEP-MON-2005-10-29 (Monetary Economics)

References

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Citations

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Cited by:

1. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June.
   
   • Ivo J.M. Arnold, 2005. "Optimal regional biases in ECB interest rate setting," Nyenrode Research Papers Series 05-01, Nyenrode Business Universiteit.
2. Höpner, Martin & Schäfer, Armin (ed.), 2008. "Die Politische Ökonomie der europäischen Integration," Schriften aus dem Max-Planck-Institut für Gesellschaftsforschung Köln, Max Planck Institute for the Study of Societies, volume 61, number 61.
3. Ivo J. M. Arnold & Jan J.G. Lemmen, 2006. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," CESifo Working Paper Series 1667, CESifo Group Munich.
   
   • Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(2), pages 325-346, July.
4. Clemens J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.
5. Andrzej Torój, 2010. "Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia," Working Papers 3, Ministry of Finance in Poland.
6. Carlos J. Rodriguez-Fuentes & Antonio Olivera-Herrera & David Padron-Marrero, 2004. "Monetary policy and inflation persistence in the Eurozone," ERSA conference papers ersa04p218, European Regional Science Association.
7. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," National Bank of Poland Working Papers 54, National Bank of Poland, Economic Institute.

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