The Geography of Monetary Transmission: Household Liquidity and Regional Impulse Responses

Abstract

Heterogeneous Agent New Keynesian (HANK) models predict that monetary policy transmits more powerfully through regions with greater shares of liquidity-constrained households. We test this prediction using local projections that interact high-frequency monetary policy shocks with cross-state variation in hand-to-mouth household shares across 51 U.S. states over 1994–2020. States in the top tercile of household liquidity constraints exhibit employment responses to monetary easing roughly twice as large as bottom-tercile states at the two-year horizon. The amplification survives controlling for homeownership rates and the non-tradable employment share—isolating the household balance sheet channel from competing mechanisms. Three alternative liquidity measures yield consistent point estimates. A complementary Bartik analysis of federal fiscal transfers yields corroborating evidence: transfer multipliers are significantly larger in high hand-to-mouth states. These findings provide the first cross-regional reduced-form evidence for the central transmission mechanism in HANK models.