Discussion paper

DP18319 Monetary Policy and Regional Inequality

We study the impact of monetary policy on regional inequality using granular data on economic activity at the city- and county-level in Europe. We document pronounced heterogeneity in the regional patterns of monetary policy transmission. The output response to monetary policy shocks is stronger and more persistent in poorer regions, with the difference becoming particularly pronounced in the tails of the distribution. Regions in the lower parts of the distribution exhibit hysteresis, consisting of long-lived adjustments in employment and labor productivity in response to the shocks. As a consequence, policy tightening aggravates regional inequality and policy easing mitigates it. Finally we provide a structural interpretation of our results using a New Keynesian Currency Union Model with hysteresis effects.


de Groot, O, S Hauptmeier, F Holm-Hadulla and K Nikalexi (2023), ‘DP18319 Monetary Policy and Regional Inequality‘, CEPR Discussion Paper No. 18319. CEPR Press, Paris & London. https://cepr.org/publications/dp18319