Monetary Policy and Regional Inequality

Abstract

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Risk Sharing and Monetary Policy Transmission

“…Smets and Wouters, 2003) and with previous studies using regional data for the euro area (e.g. Hauptmeier et al, 2020).…”

“…5 Applying these insights to the geographical dimension, there is also in-creasing evidence that the regional incidence of monetary policy differs depending on initial conditions and economic structures (Coeuré, 2018). For instance, Hauptmeier et al (2020) document that the output response to euro area monetary policy shocks is stronger and more persistent for poorer regions, and similar studies for the US economy point to heterogeneity in transmission for instance due to differences in local mortgage market conditions (Neville et al, 2012;Fratantoni and Schuh, 2003;Di Maggio et al, 2017;Beraja et al, 2019). Our paper is the first to integrate risk sharing into an empirical analysis of monetary policy transmission.…”

“…As a starting point, we follow Hauptmeier et al (2020) in estimating the dynamic effects of monetary policy on regional output. We apply Jordà (2005)'s local projections method consisting in a set of regressions of the form:…”

“…Controlling for aggregate macroeconomic conditions, monetary policy should be exogenous to variation in regional GDP, which serves as our main identification assumption. As discussed in Hauptmeier et al (2020), this assumption is supported by: (i) the ECB's mandate pertaining to the euro area level (ECB, 1998); (ii) the small size of individual regions relative to the euro area economy as a whole; 13 and (iii) the long publication lags for regional data, which become available only around two to three years after the period they refer to and, as such, are not part of the policy-relevant information set in real-time. In Section 5 we also subject this identification assumption 12 Following the literature, we use the 3-month Euribor as our measure of the policy-controlled shortterm interest rate (e.g.…”

“…The analysis exploits region-1 See, e.g., Mundell (1961); McKinnon (1963); Kenen (1969); and Farhi and Werning (2017). 2 Monetary-policy relevant aspects of economic structure include, e.g., industry composition and the financing mix of firms (Carlino and Defina, 1998;Peersman and Smets, 2005;Dedola and Lippi, 2005;Hauptmeier et al, 2020). Relevant initial conditions include the state of the business-, credit-, and policy-cycle (Tenreyro and Thwaites, 2016;Jordà et al, 2020;Alpanda et al, 2021;Eichenbaum et al, 2022), as well as household income and wealth distributions, which may interact with their marginal propensity to consume (Kaplan et al, 2018).…”