Local Monetary Policy

Abstract

When Federal Reserve districts experience high inflation but lack voting rights to influence FOMC decisions, Federal Reserve Banks reduce the amount of credit extended via the Discount Window (DW). The identification strategy is based on the exogenous rotation of voting rights among Reserve Banks and on within borrower-time and district-time variations in DW loans and Federal Home Loan Bank (FHLB) loans, implying that factors related to changes in local demand for credit or changes in borrower characteristics cannot drive the results. Our findings suggest the existence of Local Monetary Policy (LMP) executed by the Federal Reserve Banks.

Keywords: JEL Classification: E5, E51, E58, D7 Federal Reserve System, monetary policy, local economic conditions, voting rights, Discount Window loans

JEL Classification: E5, E51, E58, D7