Extending the evidence to the state level is important for two reasons. First, states within a region may have quite varied responses to monetary policy actions: responses different from one another and from the region’s overall response. For example, we found that five of the seven states in the Plains region show an effect below the regional average, and two states, Missouri and Minnesota, show an above-average impact. Missouri and Minnesota account for more than one-half of the personal income in the Plains region.

Second, a state-level study provides 48 individual responses to monetary policy actions, not just the eight responses in our regional study.2 The states, therefore, provide a richer testing ground for determining the sources of the differential responses. Our analysis indicates that state economies with a large proportion of the interest-sensitive industries — construction and durable goods manufacturing—are more responsive to changes in monetary policy than the more industrially diverse states. Our earlier study showed the same is true for regional economies as well. While our earlier analysis indicated that a region’s concentration of small firms possibly has an effect on a region’s response to changes in policy, no such association was evident for states. Finally, as in our regional study, a greater concentration of small banks is found to decrease a state’s sensitivity to monetary policy shocks, contrary to predictions of some economists.

This article appeared in the July/August 1999 edition of Business Review.

  1. See the 1996 article by Gerald A. Carlino and Robert DeFina.
  2. Since Alaska and Hawaii do not share common borders with any other state, we limited our study to the 48 contiguous states.
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