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REGIONAL BUSINESS CYCLES AND THE NATURAL RATE OF UNEMPLOYMENT

Gylfi Zoega

Economics from Department of Economics, Central bank of Iceland

Abstract: Monetary policy is nearly always formulated on the basis of national-level macroeconomic data. This is in spite of the well-known observation that its impact typically differs across regions and industries. The paper shows how policy making might benefit from closer attention to regional developments. Our model is motivated by micro-econometric evidence that shows the response of wage inflation to vacancies to be non-linear: an increase in vacancies raises wage inflation at an increasing rate. Based on this observation, we use a model of the natural rate of unemployment to show that the greater is the dispersion of regional vacancy rates, the higher is the national inflation rate. Our empirical results show that changes in the distribution of regional unemployment in the United States in the 1990s is attributed, in part, to a falling natural rate.

Date: 2002-11
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Related works:
Journal Article: U. S. regional business cycles and the natural rate of unemployment (2004) Downloads
Working Paper: U. S. regional business cycles and the natural rate of unemployment (2003) Downloads
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