The Regional Effects of Monetary Policy: A Survey of the Empirical Literature

Abstract

This survey provides an updated review of the empirical literature on the regional effects of monetary policy in economic activity by means of undertaking a threefold perspective. First, the main methodological dimensions of this literature are examined while pinpointing those modelling or methodological traits that constitute a source of diverging estimates and thereby produce inconclusive evidence. Secondly, the estimates yielded by the literature are summarized by carrying out a crossstudy analysis of the results for each monetary union. By drawing on empirical regularities that are robust across studies, the conclusiveness of the results is assessed, while those monetary unions for which conclusive evidence is still lacking are also identified. Lastly, the sources of regional heterogeneity identified by these studies are reviewed in order to shed some light on the linkage between monetary policy and territorial heterogeneity. As a result of this threefold perspective, this survey delivers overall structured conclusions and updated policy-relevant lessons. Moreover, various research gaps and emerging topics in the literature are also identified.

Variations in the Effects of a Single Monetary Policy: The Case of Russian Regions

“…The models have satisfactory explanatory power in comparison to the findings of other empirical studies. A review by Dominguez-Torres and Hierro (2019) shows that the proportion of explained variance is on average about 41% for all models considered and about 40% for the emerging economies models. In this paper, the identified factors provide for R 2 at the level of 30-40%, which is a good result but, as in all other cases, indicates the existence of a number of factors with unidentifiable influence.…”

“…7 From here on we use quotation marks referring to the channel names, since we use them not in a rigid sense conventional for the literature on monetary policy transmission, but rather to denote certain patterns revealed by the literature studying the factors of the heterogeneity of the monetary policy response of the regional variables. For a review of works demonstrating the role of the various channels in explaining a region's response to monetary policy shocks, as well as a list of works that study various factors of the heterogeneous regional response, see Dominguez-Torres and Hierro (2019). march 2021 variables DeFina, 1998, 1999).…”

Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy

“…1) The interest rate channel: the impacts of monetary policy can be affected by the interest sensitivity of production, which can be proxied by the provincial industry mix DeFina, 1998, 1999;Dominguez-Torres and Hierro, 2019). Specifically, the share of tertiary industry ("Tertiary_industry") is included in the list of confounding variables.…”

“…ii) Which regional factors determine the possible heterogeneous impacts of the monetary policy? Dominguez-Torres and Hierro (2019) summarized that the heterogeneous regional impacts of monetary policy could be varied through three major channels: the interest-rate channel affecting the interest-sensitive industry, the exchange-rate channel influencing the exports through the changes in the exchange rate, and the credit channel affecting the demand for and supply of credits. Therefore, factors related to these three channels will be included.…”

Measuring the effect of monetary shocks on European sovereign country risk: an application of GVAR models

“…For instance, factor-augmented models, spatial and Bayesian methods also provide alternatives to reduce the dimensionality in an inter-connected empirical model with interdependence and spillovers. A recent and extensive summary of regional models to study monetary shocks appears in Dominguez-Torres and Hierro (2019).…”