C H A P T E R T W E N T Y - S I X Macroeconomic Analysis Using Regional Data: An Application to Monetary Policy INTRODUCTION Increasingly, macroeconomists have come to recognize that subnational economies, such as those of regions and urban areas, are useful laboratories for examining theory and policy. | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER TWENTY-SIX Macroeconomic Analysis Using Regional Data An Application to Monetary Policy Gerald A. Carlino and Robert H. DeFina Introduction Increasingly macroeconomists have come to recognize that subnational economies such as those of regions and urban areas are useful laboratories for examining theory and policy. In part the advantage of regional analysis is simply additional data. For example if a researcher wants to examine the effects of changes in interest rates on employment or output a national economy offers a single set of observations with which to estimate the relationship. To obtain a deeper understanding of macro phenomena studies often expand the analysis to include data from other countries such as a selection of industrialized countries. The benefit from the additional observations is partially offset by the lack of comparability across countries with regard to legal political and social systems. To some degree it is possible to control for these differences but such techniques are far from perfect. An alternative approach is to use data from different areas within a This chapter does not necessarily reflect the opinions of the Federal Reserve Bank of Philadelphia the Federal Reserve System or Villanova University. Macroeconomic Analysis Using Regional Data 441 country. These include metropolitan areas states and broader regions composed of several states. Within-country regional data provide additional samples where the legal political and social environments are quite similar. A good example of these considerations is the empirical work done by economists during the past decade examining income convergence across countries and regions within countries. The neoclassical growth model predicts that eventually incomes in different countries will converge. The basic idea is that incomes will become increasingly similar
