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The Regional Keynesian Cross

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  • Marco Bellifemine
  • Adrien Couturier
  • Rustam Jamilov

Abstract

We study monetary policy transmission across space. Empirically, we show that two channels explain a sizable portion of the variation in the regional effects of identified U.S. monetary policy shocks: local marginal propensities to consume (MPCs), as captured by household wealth, and industry composition, as measured by the local share of non-tradable employment. Theoretically, we develop a heterogeneous agents New Keynesian (HANK) model of a monetary union with two-layered regional heterogeneity in household and industry composition. We provide a sequence-space characterization of the response of local employment to unexpected changes in interest rates as a function of intertemporal MPCs and industry composition: the regional Keynesian cross. Central to our theory is an equilibrium complementarity between these two sources of regional heterogeneity. We provide direct empirical evidence of this household industry complementarity, thus validating our key model mechanism. Quantitatively, reactions from fiscal authorities and the rest of the nation are key determining factors of the aggregate regional economic response.

Suggested Citation

  • Marco Bellifemine & Adrien Couturier & Rustam Jamilov, 2022. "The Regional Keynesian Cross," Economics Series Working Papers 995, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:995
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