Florida’s Sensitivity to Monetary Policy Changes

Marisela Guillen

Literature

• Gerald Carlino and Robert DeFina: The Differential Gerald Carlino and Robert DeFina: The Differential Regional Effects of Monetary Policy. 1998 MIT Press Regional Effects of Monetary Policy. 1998 MIT Press JournalsJournals

• Federal Board Reserve comments remarks about Federal Board Reserve comments remarks about Florida’s economic growth from Vice Chairman Florida’s economic growth from Vice Chairman Roger W. Ferguson from May 12, 2000 Roger W. Ferguson from May 12, 2000

Monetary Policy Changes

• Affect the nation’s economy in different ways:Affect the nation’s economy in different ways:↑↑↓↓Spending, ∆ Hiring Decisions, Unemployment, GDP, Spending, ∆ Hiring Decisions, Unemployment, GDP, etc.etc.

• Some regions and states are more sensitive than Some regions and states are more sensitive than others. Economic Theory and research indicate three others. Economic Theory and research indicate three main reasons: main reasons: Regional differences in the mix of interest-sensitive Regional differences in the mix of interest-sensitive

industries, industries, Regional differences in the mix of large vs. small Regional differences in the mix of large vs. small

firms,firms, Regional differences in the abilities of banks to alter Regional differences in the abilities of banks to alter

their balance sheets by firm size.their balance sheets by firm size.

Term Paper Objective

To evaluate how sensitive the state of Florida is To evaluate how sensitive the state of Florida is to changes in monetary policy by analyzing to changes in monetary policy by analyzing Gross State Product sensibility.Gross State Product sensibility.

Plan for Florida’s Evaluation

To analyze the relationship between Florida’s income and To analyze the relationship between Florida’s income and Florida’s industries that contribute to gross state Florida’s industries that contribute to gross state product (GSP) to determine:product (GSP) to determine:

Mix of interest-sensitive industriesMix of interest-sensitive industries

Mix of large vs. small firmsMix of large vs. small firms

Florida’s bank loans by bank size Florida’s bank loans by bank size

Regression: annual %Regression: annual %∆∆ GSP vs. annual % GSP vs. annual %∆∆ of of the income from each industry that contributes to the income from each industry that contributes to the GSP: the GSP: Significant variablesSignificant variables

Gross State Product

GSP:GSP: It is a measurement of the economic output of a state. It is the It is a measurement of the economic output of a state. It is the sum of all value added by industries within the state and serves sum of all value added by industries within the state and serves as a counterpart to the gross domestic product or GDP. as a counterpart to the gross domestic product or GDP.

Agriculture, forestry, fishing, & hunting Mining Utilities Construction Manufacturing Wholesale trade Retail trade Transportation and warehousing, excluding Postal Service Information Finance and insurance

Real estate, rental, and leasing Professional and technical

services Management of companies &

enterprises Administrative and waste services Educational services Health care and social assistance Arts, entertainment,& recreation Accommodation and food

services Other services, except

government Government

Mix of Interest- Sensitive Industries

2004 Florida's GSP

Others16%

Construction7%

Manufacturing5%

Wholesale trade7%

Retail trade8%

Information4%

Finance & insurance

7%

Real estate16%

Profes & technical serv

6%

Adm & waste services

5%

Health care & social assist

7%

Government12%

Illustration: Florida’s Real Estate Income vs. Target Fed Fund Rate

Income Real Estate vs. Fed Funds rate

0123456789

10111213

15000 20000 25000 30000 35000 40000 45000 50000 55000 60000 65000 70000 75000 80000 85000 90000 95000 100000 105000 110000Income (millions of $)

'03

'90

'91

'92-'93

'94

'95-'96'98

'99-'00

'01 '04'02

'97

'89

'88

'87'86

'85

'84'83

'82

Large vs. Small Firms

% Small Firms defined as firms 0-100employees  US Floridayear # firms % # firms %1997 5,446,132 98.27% 337,069 97.29%1998 5,482,724 98.27% 339,040 97.28%1999 5,509,656 98.25% 340,549 97.25%2000 5,551,006 98.20% 344,208 97.24%2001 5,555,103 98.19% 348,535 97.24%2002 5,598,580 98.26% 360,928 97.34%2003 5,665,372 98.24% 371,530 97.35%

% Florida's loans per bank size

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

1994 1996 1998 2000 2002 2004

year

%lo

ans

per b

ank

size

Assets < $100M"Assets >$100M<$1BAssets > $1B

Regression(data from 1963 to 2003):

% ∆ GSP = 0.00657 + 0.0283 % ∆ Agriculture, forestry, fishing + 0.00349% ∆Mining + 0.0118 % ∆ Utilities + % ∆ GSP = 0.00657 + 0.0283 % ∆ Agriculture, forestry, fishing + 0.00349% ∆Mining + 0.0118 % ∆ Utilities + 0.0762 % ∆ Construction + 0.102 % ∆ Manufacturing + 0.0689 % ∆ Wholesale trade + 0.0700 % ∆ Retail trade+ 0.0762 % ∆ Construction + 0.102 % ∆ Manufacturing + 0.0689 % ∆ Wholesale trade + 0.0700 % ∆ Retail trade+ 0.0398 % ∆ Transportation and warehousing + 0.0547 % ∆Information + 0.0617 % ∆ Finance and insurance + 0.0398 % ∆ Transportation and warehousing + 0.0547 % ∆Information + 0.0617 % ∆ Finance and insurance + 0.103 % ∆ Real estate, rental, and leasing + 0.0666 % ∆ Professional and technical services + 0.0343 % ∆ 0.103 % ∆ Real estate, rental, and leasing + 0.0666 % ∆ Professional and technical services + 0.0343 % ∆ Management of companies & enterprises + 0.0048 % ∆ Administrative and waste ser + 0.0033 % ∆ Educational Management of companies & enterprises + 0.0048 % ∆ Administrative and waste ser + 0.0033 % ∆ Educational service + 0.0555 % ∆ Health care and social assistance + 0.0242 % ∆Arts, entertainment, and recreation - service + 0.0555 % ∆ Health care and social assistance + 0.0242 % ∆Arts, entertainment, and recreation - 0.0093 % ∆ Accommodation and food services + 0.0227 % ∆ Other services, except government + 0.101 % ∆ 0.0093 % ∆ Accommodation and food services + 0.0227 % ∆ Other services, except government + 0.101 % ∆ GovernmentGovernment

F-test p-value 0.000 < 0.05 (5% level) at least one of the IV affects % ∆ F-test p-value 0.000 < 0.05 (5% level) at least one of the IV affects % ∆ GSPGSP

RR²²-adj is 99.6% : 99.6% of variation of Florida’s GSP explained by IV -adj is 99.6% : 99.6% of variation of Florida’s GSP explained by IV variationvariation

t-statistics IVs: mining, utilities, management of companies, administrative t-statistics IVs: mining, utilities, management of companies, administrative and waste services, educational services, and accommodation and food and waste services, educational services, and accommodation and food services are not significant variables at the 5% level that affect Florida’s services are not significant variables at the 5% level that affect Florida’s GSP. GSP.

No Heteroskedasticity: No Heteroskedasticity:

Conclusion

Florida’s economy has characteristics that indicate it is sensitive to monetary Florida’s economy has characteristics that indicate it is sensitive to monetary policy changes:policy changes:

Industries such as real estate, manufacturing, construction, and wholesale Industries such as real estate, manufacturing, construction, and wholesale and retail trading account for more than 40% of Florida GSP in 2004. and retail trading account for more than 40% of Florida GSP in 2004.

Mix of large vs. small firms: Florida has around 97% of small firms. Mix of large vs. small firms: Florida has around 97% of small firms.

Proportion of loans from medium size banks has been steadily increasing Proportion of loans from medium size banks has been steadily increasing since 1997 to reach almost 60% in 2003. since 1997 to reach almost 60% in 2003.

Regression equation: Among the significant variables interest-sensitive Regression equation: Among the significant variables interest-sensitive industries: construction, real estate, manufacturing, and wholesale and industries: construction, real estate, manufacturing, and wholesale and retail trading. retail trading.

Thank you Thank you