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Structural breaks and regional disparities in the transmission of monetary policy

  • Michael T. Owyang
  • Howard J. Wall

Using a regional VAR, we find large differences in the effects of monetary policy shocks across regions of the United States. We also find that the region-level effects of monetary policy differ a great deal between the pre-Volcker and Volcker-Greenspan periods in terms of their depth and length. The two sample periods also yield very different rankings of the regions in terms of the effects of monetary policy. Our regional VAR also suggests that aggregate VARs that ignore regional variations can suffer from severe aggregation bias. We use the results of our regional VAR to find evidence that recession depth related to the banking concentration and that the total cost of recession is related to the industry mix. Finally, we demonstrate that the differences between the two sample periods are due to changes in the mechanism by which monetary policy shocks are propagated.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-008.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2003-008
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  1. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
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  16. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional Influences on U.S. Monetary Policy: Some Implications for Europe," CEP Discussion Papers dp0523, Centre for Economic Performance, LSE.
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  25. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
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