In a standard New Keynesian model, the central bank moves the real rate when it changes the nominal interest rate since the price level responds sluggishly to change in nominal rates due to nominal rigidity. Monetary policy is non-neutral, for it moves the real rate, thus alters agents’ intertemporal consumption decisions. The standard model is a simplified world without information frictions or regional heterogeneity. In a world with information frictions, monetary policy actions communicate to the public about the central bank’s private information. Monetary policy can generate additional effects by shaping agents’ beliefs about the true state of the economy or the future monetary policy path. In a world with regional heterogeneity, monetary policy can have interesting interactions with local characteristics. This dissertation investigates regime-dependent, state-dependent, and heterogeneous regional effects of monetary policy.
Chapter 1 introduces a new regime dependence of monetary policy due to information frictions: the effects of monetary policy shocks depend on the type of the fundamental macro shock in the economy. Specifically, output responses to monetary policy shocks are amplified relative to their counterparts in perfect information models when the fundamental macro shock is a productivity level shock or a demand shock. In contrast, output responses are dampened when the fundamental macro shock is a productivity growth rate shock. Households observe the overall fundamental in the economy but cannot distinguish its persistent part from its temporary part. The central bank sets the interest rate tracking a function of the persistent fundamental plus a monetary policy shock, so the interest rate is a noisy signal about the persistent fundamental with the monetary policy shock as the noise. Exogenous monetary policy shocks lead households to update their perceptions about the persistent fundamental differently facing varying types of fundamental macro shocks, thus generating heterogeneous effects on output.
Chapter 2 introduces the position effect: the effects of a monetary policy shock depend on its relative position in the monetary policy sequence. I use both event study and local projections methods to investigate how the effects of monetary policy depend on the relative position of monetary policy shocks in monetary policy sequences. The effects of monetary policy are less potent in the first half of monetary policy sequences, which I phrase as the position effect. Possible explanations include different implicit forward guidance, different information effects, and Fed's different interest rate smoothing behavior at different positions in the monetary policy sequence. I provide supporting evidence for the interest rate smoothing behavior: less interest rate smoothing in the first half of a monetary policy sequence shortens the shock duration, thus weakening the effect.
Chapter 3, joint work with Ninghui Li, investigates the regional heterogeneity of monetary policy on local house prices. House prices in growing urban areas are more sensitive to monetary policy. We first define urban growth and urban decline using CBSA level population data and then test local house prices to monetary policy shocks using local projections. The housing supply elasticity does not drive our results, although it plays a role in house price dynamics. We find evidence supporting that the effect of monetary policy interacts with the long-run expectations driven by local population growth.
