Changes In The Regional Responsiveness To Federal Reserve Policy Shocks And The Declining Importance Of Interest Rate Sensitive Industry Sectors
Authors: Potts Todd , Yerger David 
Published: February 2016

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper extends the existing research on regional economic responses to federal-reserve policy shocks along two dimensions.<span style="mso-spacerun: yes;">&nbsp; </span>First, we focus on the evolution over time of a particular region&rsquo;s responsiveness to federal funds shocks.<span style="mso-spacerun: yes;">&nbsp; </span>This differs from prior work that analyzed differences across regions in their responsiveness to a federal funds shock over a single sample period.<span style="mso-spacerun: yes;">&nbsp; </span>For the state of Delaware, we track how the declining importance of manufacturing and construction alters the region&rsquo;s income response to both federal funds rate and oil price shocks.<span style="mso-spacerun: yes;">&nbsp; </span>Delaware was selected for analysis because of the large decline since the 1970&rsquo;s in the share of its Gross State Product coming from construction and manufacturing.</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">&nbsp;</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper&rsquo;s second extension of the literature is its use of sequential updating of the data set.<span style="mso-spacerun: yes;">&nbsp; </span>Prior research utilized quarterly data sets starting in the late 1950&rsquo;s and ending in the early 1990&rsquo;s.<span style="mso-spacerun: yes;">&nbsp; </span>We construct a parsimonious structural VAR model and first estimate the model over the 1958Q1 to 1992 Q4 period. Over this period our results are consistent with earlier findings.<span style="mso-spacerun: yes;">&nbsp; </span>Next, we roll the sample period forward one year at a time, keeping the time period&rsquo;s length constant, up through 2004 Q2 and re-estimate the model after each resetting of the sample period. </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">&nbsp;</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Overall, our findings are consistent with the view that declines in the importance of interest rate sensitive sectors will lead to declines in the responsiveness of a region&rsquo;s income growth to federal funds rate shocks, but the magnitude of the observed decline in income sensitivity is considerably smaller than what one would forecast based upon the earlier cross-sectional based research.<span style="mso-spacerun: yes;">&nbsp; </span>The impact of oil price shocks, however, was contrary to &lsquo;conventional wisdom&rsquo; expectations.<span style="mso-spacerun: yes;">&nbsp; </span>Despite the declining share of manufacturing in GSP for Delaware over the rolling sample periods, there was a modest increase in the sensitivity of Delaware real personal income to oil price shocks as the sample period rolled forward.</span></span></p>