The Response of U.S. States to Exogenous Oil Supply and Monetary Policy Shocks

Abstract

We make use of new methodological advances in quantifying oil supply and monetary policy shocks that are exogenous with respect to macroeconomic conditions to examine the response of state economies to these shocks. Our approach is parsimonious and straightforward: once exogenous oil supply shocks and monetary policy shocks have been identified, the dynamic response of state economies to exogenous shocks can be analyzed directly using ordinary least squares (OLS) and other conventional methods of inference. The fact that no identifying assumptions are required makes our findings invariant to different identification schemes. Results indicate that an exogenous monetary policy shock typically causes a decrease in real personal income. The paper also documents a fair degree of similarity in the response of real personal income to exogenous oil supply across many states. Like the aggregate response, following an exogenous oil supply shock, real personal income decreases in many states.