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Monetary Policy, Fisal Federalism, and Capital Intensity

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Can monetary policy shocks induce redistribution across natural resource rich and poor economies within a union? Resource-rich economies are more capital intensive. A two-region monetary union DSGE model with an equalizing fiscal rule and heterogeneity in capital intensity shows that positive monetary policy shocks induce redistribution from the capital-scarce region to its capital-rich counterpart because investment contracts more strongly in the latter. These patterns persist over the medium-term. We test the model's predictions using a panel of U.S. states over the period 1969-2007. Our identification strategy rests on narrative-based monetary policy shocks that are exogenous to individual states, and geographically-based cross-state differences in natural endowments interacted with the international price of oil. The empirical results corroborate the theoretical predictions. We find that a contractionary monetary policy shock induces a relative drop (increase) in investment (federal transfers) in resource-rich states, over the course of four years, due to differences in capital intensities. We estimate that approximately $2.4 billion is redistributed from the resource-poor to the resource-rich states, within the first year of the shock.

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  • Ohad Raveh, 2016. "Monetary Policy, Fisal Federalism, and Capital Intensity," OxCarre Working Papers 181, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:181
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    More about this item

    Keywords

    Monetarypolicy; naturalresources; redistribution;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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