Monetary Policy and Regional Inequality

73 Pages Posted: 9 Apr 2024

See all articles by Oliver de Groot

Oliver de Groot

University of Liverpool - Management School (ULMS)

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Federic Holm-Hadulla

European Central Bank (ECB)

Katerina Nikalexi

London Business School

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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, Endogenous Technological Change, New Keynesian Model

Suggested Citation

de Groot, Oliver and Hauptmeier, Sebastian and Holm-Hadulla, Federic and Nikalexi, Katerina, Monetary Policy and Regional Inequality. Available at SSRN: https://ssrn.com/abstract=4788667 or http://dx.doi.org/10.2139/ssrn.4788667

Oliver De Groot

University of Liverpool - Management School (ULMS) ( email )

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Federic Holm-Hadulla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Katerina Nikalexi (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

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