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This paper extends the existing research on regional economic responses to federal-reserve policy shocks along two dimensions. First, we focus on the evolution over time of a particular region’s responsiveness to federal funds shocks. This differs from prior work that analyzed differences across regions in their responsiveness to a federal funds shock over a single sample period. For the state of Delaware, we track how the declining importance of manufacturing and construction alters the region’s income response to both federal funds rate and oil price shocks. Delaware was selected for analysis because of the large decline since the 1970’s in the share of its Gross State Product coming from construction and manufacturing. This paper’s second extension of the literature is its use of sequential updating of the data set. Prior research utilized quarterly data sets starting in the late 1950’s and ending in the early 1990’s. 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. Next, we roll the sample period forward one year at a time, keeping the time period’s length constant, up through 2004 Q2 and re-estimate the model after each resetting of the sample period. 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’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. The impact of oil price shocks, however, was contrary to ‘conventional wisdom’ expectations. 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.

Changes In The Regional Responsiveness To Federal Reserve Policy Shocks And The Declining Importance Of Interest Rate Sensitive Industry Sectors