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Monetary Policy, Fisal Federalism, and Capital Intensity

Nadav Ben Zeev () and Ohad Raveh

No 181, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Does monetary policy play a role in scal federalism? This paper presents a novel implication of monetary policy shocks by studying their heterogeneous e ects across federal-states and their consequent connection to scal equalization. A two-region monetary union DSGE model with a federal equalization mechanism shows that capital intensive states experience a relatively larger contraction following a positive monetary policy shock, due to the greater share that capital takes in their production process. This, in turn, brings them greater in ows of federal grants. We show that state-heterogeneity in capital intensity is explained by levels of natural resource abundance over large periods, and hence by pre-determined geographical characteristics. Based on this identi cation strategy, we test the model's predictions using a panel of U.S. states over the period 1969-2007 and nd that following a one standard deviation monetary policy shock, output growth (output share of federal transfers) in capital intensive states contemporaneously decreases (increases) by 1% relative to their counterparts, on average. In addition, we nd no di erential e ects on other state-level economic indicators, consistent with the model.

Keywords: natural monetary policy; fiscal federalism; capital intensity (search for similar items in EconPapers)
JEL-codes: E52 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2017
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