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The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States

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  • I. Arnold
  • C.J.M. Kool

Abstract

Within a monetary union, regional inflation differentials lead to a competition between the real interest rate and wealth channels on the one hand and the real exchange rate channel on the other hand in the transmission of regional shocks. This may have implications for the length and vehemence of regional business cycles. This paper tries to quantify how these forces work against each other using regional data for the United States. Our estimates indicate that, following an increase in the regional inflation rate, in the short run the pro-cyclical effect through the real interest rate and wealth channels is strongest. After a period of about 3-4 years the cumulative worsening of the competitive position asserts its influence. Regional cycles in the housing market have a clear pro-cyclical effect and are, on their part, affected by regional real interest rates and real growth.

Suggested Citation

  • I. Arnold & C.J.M. Kool, 2004. "The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States," Working Papers 04-13, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:0413
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    Cited by:

    1. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(2), pages 325-346, July.
    2. Jan Marc Berk & Job Swank, 2007. "Regional real exchange rates and Phillips curves in monetary unions - Evidence from the US and EMU," DNB Working Papers 147, Netherlands Central Bank, Research Department.
    3. Carlos J. Rodriguez-Fuentes & Antonio Olivera-Herrera & David Padron-Marrero, 2004. "Monetary policy and inflation persistence in the Eurozone," ERSA conference papers ersa04p218, European Regional Science Association.
    4. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," NBP Working Papers 54, Narodowy Bank Polski.
    5. Polina S. Kuklinova & Vladimir V. Ilyashenko, 2022. "The impact of the inflation-targeting regime on the economic development of an industrial region," Journal of New Economy, Ural State University of Economics, vol. 23(2), pages 125-141, July.
    6. van Ewijk, Saskia E. & Arnold, Ivo J.M., 2015. "Financial integration in the euro area: Pro-cyclical effects and economic convergence," Economic Modelling, Elsevier, vol. 44(C), pages 335-342.
    7. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June.
    8. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.
    9. Andrzej Toroj, 2011. "Competitiveness channel in Poland and Slovakia: a pre-EMU DSGE analysis," NBP Working Papers 86, Narodowy Bank Polski.
    10. Arnold, Ivo J.M. & Soederhuizen, Beau, 2016. "Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 88-103.
    11. Höpner, Martin & Schäfer, Armin (ed.), 2008. "Die Politische Ökonomie der europäischen Integration," Schriften aus dem Max-Planck-Institut für Gesellschaftsforschung Köln, Max Planck Institute for the Study of Societies, volume 61, number 61.
    12. Arnold Ivo J. M., 2023. "The Activation Conditions of the Transmission Protection Instrument: Flawed by Design?," Intereconomics: Review of European Economic Policy, Sciendo, vol. 58(5), pages 254-259, September.
    13. Sebastian Dullien & Ulrich Fritsche, 2007. "Anhaltende Divergenz bei Inflations- und Lohnentwicklung in der Eurozone: Gefahr für die Währungsunion?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 76(4), pages 56-76.
    14. Arnold, Ivo J.M., 2023. "Teaching economics of monetary union with the IS-MP-PC model," International Review of Economics Education, Elsevier, vol. 44(C).
    15. Torój, Andrzej, 2010. "Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia," MF Working Papers 4, Ministry of Finance in Poland, revised 11 May 2010.

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    Keywords

    monetary union; regional effects; inflation differentials; monetary transmission;
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