Monetary Policy, Natural Resources, and Federal Redistribution

Abstract

Can monetary policy shocks induce redistribution across natural resource rich and poor states within a federation? We conjecture that resource-rich states are capital intensive, hence their investment is more responsive to changes in monetary policy. Consequently, contractionary monetary policy shocks (e.g., increases in the interest rate) may induce redistribution from resource-poor states to resource-rich ones, via an equalizing federal transfer scheme, because investment is reduced more strongly in the latter. We test these hypotheses using a panel of U.S. states covering several decades, and find that: i) resource-rich states are significantly and persistently more capital intensive; ii) contractionary monetary policy shocks induce a relative drop (increase) in investment (federal transfers) in resource-rich states, over the course of four years; iii) these patterns are driven by resource-induced differences in the capital share in the economy. We estimate that a one standard deviation contractionary monetary shock induces, within the first year, federal redistribution of approximately $2.5 billion from the resource-poor to the resource-rich states, representing about 11% of the total average annual federal transfers received by the latter states.

Keywords: monetary policy, natural resources, redistribution

JEL Classification: E52, Q32, H77