The Interaction of Debt and Monetary Policy; What Does State-Level Data Say?

Abstract

I examine how monetary policy has various effects for states across the U.S. depending on the state's level of household indebtedness. Using panel regressions, I find that monetary policy has smaller stimulative effects on a state's output growth in states with high levels of debt. I then investigate the effectiveness of the same mechanism before and after the Financial Crisis of 2008. I also find that monetary policy after 2008 has a stronger effect on the growth of output and the growth of debt than monetary policy prior to 2008.