Under Pressure: Regional Divergence and Monetary Accommodation in Canada

Under Pressure: Regional Divergence and Monetary Accommodation in Canada

This paper examines whether regional economic divergence helps explain monetary policy deviations from standard aggregate prescriptions. Using monthly Canadian data from 1999 to 2024, we estimate benchmark Taylor-type rules for the Bank of Canada and interpret the residual component, with reversed sign, as a measure of monetary accommodation relative to fundamentals. We then relate this measure to provincial labor-market conditions constructed from unemployment gaps. The main result is that greater cross-province dispersion in unemployment gaps predicts more accommodative policy relative to the benchmark rule. This relationship is robust across alternative specifications and does not appear to reflect only lower-tail distress or one-region-specific conditions. The evidence instead points to a broader regional-divergence channel, with particularly strong contrasts between fossil-industry and non-fossil provinces. Additional institutional and textual evidence suggests that regional information flows, rather than regional favoritism, may help account for this pattern. Overall, the findings suggest that regional divergence matters for monetary policy even in a central bank with a national mandate and no formal regional representation.

[ - ]
[ + ]