The Effect of Regional Economic Conditions on U.S. Monetary Policy

U.S. monetary policy is determined primarily by the Federal Open Market Committee. This paper examined whether the Reserve Bank president’s voting behavior at the FOMC is influenced by economic conditions in their district, using new and precise estimates of district unemployment and a longer and more recent time series. We find that the district unemployment rate is the primary determinant of Regional Bank Presidents’ probability of dissension from FOMC policy decisions. In our baseline regression, a one percent increase in the district unemployment rate relative to the national rate increases the probability of a tightening dissension by 1.3 percentage points. This result is robust to addition of other explanatory variables and to the use of alternative estimation methods. The study also finds that the rate of dissension by Regional Bank Presidents does not depend upon either the national unemployment rate or national inflation rate. This suggests that Regional Bank Presidents react to these variables in the same manner as the rest of the FOMC.