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

  • Olivier Coibion

    ()

    (Department of Economics, College of William and Mary)

  • Daniel Goldstein

    ()

    (Department of Economics, Pennsylvania State University)

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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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
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Fax: (757) 221-2390
Web page: http://www.wm.edu/economics/

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  1. Lawrence J. Christiano & Wouter J. Den Haan, 1995. "Small Sample Properties of GMM for Business Cycle Analysis," NBER Technical Working Papers 0177, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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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