Macroeconomic Monetary Policy and Sub-macroeconomic Impacts: Evaluation across Eras

This study examines the impacts of monetary policy on regions of the United States. The purpose is to show how monetary policy decisions affect the average economy relative to disaggregate components, and to examine the effects over different periods. This will provide broader insight into the workings of the economy beyond the aggregate impacts, and should add a significant amount of information to the current literature on regional monetary effects. To allow for endogeneity between variables, the vector autoregression (VAR) method is used. Impulse response functions (IRFs) are derived to show dynamic responses of regions to a monetary policy shock. The monetary policy affects on regions are compared across time by splitting the data into two sub-samples. Also, potential transmission mechanisms for monetary policy are examined.

In general, results indicate that monetary policy shocks affect regional economies differently, and that these effects have changed over time. As a monetary shock increases the federal funds rate, the real per capita personal income in regions will decrease. In addition, these negative responses to a rise in the federal funds rate differ in magnitude across the regions. Some regions, such as the Great Lakes, tend to have a greater response to a shock, while other regions, such as the Southwest, respond less to a federal funds rate shock. The sub-sample periods showed the regional responses between two periods: 1959 – 1979 and 1980 – 2003. The magnitude of the affects in period two are much smaller than those in period one indicating that monetary policy has less of an impact in the later period.

This study also examined potential transmission mechanisms that convey monetary policy shocks through the economy. The results indicate that the interest rate channel, consumption channel, and credit channel are all potential mechanisms for monetary policy. However, the results also indicate that the transmission mechanisms for monetary policy may have changed and that the important mechanisms operative in the first period (1959 – 1979) were diminished in importance during the later period (1980 – 2003).