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

Olivier Coibion and Daniel Goldstein ()
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Daniel Goldstein: Department of Economics, Pennsylvania State University

No 58, Working Papers from Department of Economics, College of William and Mary

Abstract: We document a novel empirical phenomenon: both the US Federal Reserve and the European Central Bank appear to set interest rates partly in response to regional disparities in unemployment rates. This result is remarkably robust – particularly for the US – even after controlling for a wide variety of factors, including the central bank’s information set and a battery of explanatory variables. Furthermore, including measures of interregional unemployment dispersion improves the precision of the estimates of the central banks’ responses to aggregate inflation and unemployment rates. Moreover, inclusion of the variance of unemployment across regions brings each bank’s policies with respect to macroeconomic aggregates into alignment with each other. We propose three models in which central bank policymaking is influenced by disparities across regions. Testing specific implications of these models suggests that each bank’s approach to policy may differ in fundamental ways.

Keywords: Regional Heterogeneity; Monetary Policy; Taylor Rules (search for similar items in EconPapers)
JEL-codes: E5 E6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written 2007-09-11
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