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Monetary Policy, Fisal Federalism, and Capital Intensity

Ohad Raveh ()
Authors registered in the RePEc Author Service: Nadav Ben Zeev ()

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

Abstract: 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.

Keywords: Monetarypolicy; naturalresources; redistribution (search for similar items in EconPapers)
JEL-codes: E52 Q32 H77 (search for similar items in EconPapers)
Date: 2016-11-23
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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