Changes over Time in New York State's Responsiveness to Monetary Shocks

This paper extends the existing research on regional economic responses to Federal Reserve policy shocks along two dimensions. First, we focus on the evolution over time of a particular region's responsiveness to federal funds shocks.This differs from prior work that analyzed differences across regions in their responsiveness to a federal funds shock over a single sample period. For the state of New York, we track how the declining importance of interest-rate sensitive manufacturing sub-sectors and construction has altered the region's income response to federal funds rate shocks. The evolution of New York State's responses to fed funds shocks is contrasted with the changes in the Rest-of-Nation's responsiveness.This paper's second extension of the literature is its use of sequential updating of the data set. Prior research utilized quarterly data sets starting in the late 1950's and ending in the early 1990's. We construct a parsimonious structural VAR model and first estimate the model over the 1958Q1 to 1992 Q4 period. Over this period our results are consistent with earlier findings. Next, we roll the sample period forward one year at a time, keeping the time period's length constant, up through 2004 Q2 and re-estimate the model after each resetting of the sample period.Overall, our findings are consistent with the view that the declining importance of interest rate sensitive sectors will lead to a decline in the responsiveness of a region's income growth to federal funds rate shocks. In both New York State and the Rest-of-Nation, responsiveness to federal funds rate shocks declined in the more recent periods in a manner consistent with their declining shares of regional income coming from interest-sensitive sectors. Consequently, estimating the model using the entire available data set leads to an overestimation of the current impact on both regions from a federal funds rate shock.