One for Some or One for All? Taylor Rules and Interregional Heterogeneity

Authors

  • OLIVIER COIBION,

    1. Olivier Coibion is an Assistant Professor in the Economics Department at the College of William and Mary and Faculty Research Fellow at the National Bureau of Economic Research (E-mail: ocoibion@wm.edu). Daniel Goldstein is a Lecturer in the Economics Department at The Pennsylvania State University (E-mail: dag27@psu.edu).
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  • DANIEL GOLDSTEIN

    1. Olivier Coibion is an Assistant Professor in the Economics Department at the College of William and Mary and Faculty Research Fellow at the National Bureau of Economic Research (E-mail: ocoibion@wm.edu). Daniel Goldstein is a Lecturer in the Economics Department at The Pennsylvania State University (E-mail: dag27@psu.edu).
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  • The authors wish to thank Pok-sang Lam, two anonymous referees, Bob Barsky, Menzie Chinn, Angus Chu, Kathryn Dominguez, Yuriy Gorodnichenko, Chris House, Peter Morrow, Linda Tesar, Matthew Shapiro, and seminar participants at the University of Michigan and the College of William and Mary for helpful comments. Olivier Coibion gratefully acknowledges the financial support of the Robert V. Roosa and Jean Monnet Dissertation Fellowships. Daniel Goldstein acknowledges the financial support of the Gerald R. Ford School of Public Policy and the Horace H. Rackham Graduate School.

Abstract

We document a novel empirical phenomenon: the U.S. Federal Reserve appears to set interest rates partly in response to regional economic disparities. This result is robust even after controlling for factors such as the central bank's forecasts and a battery of explanatory variables. We argue that this likely does not reflect an explicit concern about regional differences by policymakers but instead can be explained by a model with nonlinear regional Phillips curves. Consistent with the predictions of this model, we find that the Federal Reserve responds disproportionately to fluctuations in low unemployment states. Alternative explanations cannot account for this finding.

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