The Local Effects of Monetary Policy

Many studies have documented disparities in the regional responses to monetary policy shocks. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian SVAR. The Bayesian SVAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the city-level asymmetric responses. We find strong evidence that the population density and the size of the local government sector mitigate the effects of monetary policy on local employment. The roles of the traditional interest rate, equity, and credit channels are marginalized relative to the previous findings based on less-granular definitions of regions. However, the relevance of the interest rate and credit channels appears to be more robust to business cycle uncertainty.