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

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.