Working Paper: CEPR ID: DP18319
Authors: Oliver de Groot; Sebastian Hauptmeier; Frédéric Holmhadulla; Katerina Nikalexi
Abstract: We study the impact of monetary policy on regional inequality using granular data on economic activity at the city- and county-level in Europe. We document pronounced heterogeneity in the regional patterns of monetary policy transmission. The output response to monetary policy shocks is stronger and more persistent in poorer regions, with the difference becoming particularly pronounced in the tails of the distribution. Regions in the lower parts of the distribution exhibit hysteresis, consisting of long-lived adjustments in employment and labor productivity in response to the shocks. As a consequence, policy tightening aggravates regional inequality and policy easing mitigates it. Finally we provide a structural interpretation of our results using a New Keynesian Currency Union Model with hysteresis effects.
Keywords: Monetary Policy; Regional Heterogeneity; Local Projections; Quantile Regressions; Endogenous Technological Change; New Keynesian
JEL Codes: C32; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Regional inequality (R11) |
| Policy tightening (E63) | Regional inequality (R11) |
| Policy easing (E52) | Regional inequality (R11) |
| 100 basis point increase in interest rates (E43) | Average regional GDP (R11) |
| Monetary policy shocks (E39) | Employment and labor productivity (J29) |
| Regions in the lower parts of the distribution (D39) | Hysteresis effects (E32) |
| Hysteresis effects (E32) | Regional GDP (R15) |