Regional VARs and the channels of monetary policy

Abstract

We find that the magnitudes of the regional effects of monetary policy were considerably dampened during the Volcker–Greenspan era. For this era, regional differences in the depths and total costs of monetary-policy-induced recessions were related to the concentration of the banking sector.

Acknowledgement

This article is derived from Owyang and Wall (2005). Abbigail J. Chiodo and Kristie M. Engemann provided research assistance. We would like to acknowledge the helpful comments of a referee. The views herein are the authors' alone and do not necessarily represent the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Notes

¹ This is in contrast to Carlino and DeFina (1998, 1999), who identify a shock to the difference of the federal funds rate. In their setup, because the shock to the federal funds rate recurs each period, the monetary-policy-induced recession is permanent. Because, we consider a one-time shock, as is standard in the monetary economics literature, we can analyse the dynamics of recovery from a monetary-policy-induced recession.

² Because, we do not have suitable independent variables for the pre-Volcker–Greenspan period to estimate the channels of monetary policy in the next section, we do not consider that period presently.

³ The assignment of states to sub-regions is described in detail in Owyang and Wall (2005). Note that Alaska and Hawaii are excluded.

⁴ On the other hand, with this many regions we need to estimate the VAR with only one lag.

⁵ These data are from the BLS. For the full sample period we used the yearly manufacturing share averaged over 1969 to 2001. For the Volcker–Greenspan period, we used the same measure averaged over 1983 to 2001.

⁶ These data are from the Statistics of US Business data set. Because data are available starting in 1988, we use the same measures for both periods. Our basic results do not change if we instead use average firm size.

⁷ For each region, we use the weighted average of the state deposit shares from the State and Metropolitan Area Data Book (1986, 1991). Because the earliest data are for 1983, we use the same measures for both periods. There is little change in our results if instead, we used the share of deposits in the five largest banks.

⁸ Summary statistics for all variables are in Owyang and Wall (2005).