Heterogeneous Slack: When Uneven Unemployment Gaps Matter for Stabilization

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Abstract

I augment a Taylor-type monetary policy rule with a cross-state dispersion measure of unemployment gaps and show, via a vector autoregression with exogenous variables (VARX) counterfactual, that reacting to geographic heterogeneity in labor market conditions reduces a standard stabilization loss by 13.6% relative to the best-tuned baseline rule. A policymaker who tracks the cross-state spread of labor market conditions can reduce inflation and output volatility beyond what the best-tuned baseline achieves, with the advantage confirmed in a held-out 2019–2025 evaluation window.

Citation

Pusateri, Nicholas R. 2026. “Heterogeneous Slack: When Uneven Unemployment Gaps Matter for Stabilization” Working Paper. URL: https://nicpusateri.com/heterogeneous-slack.

@article{pusateri2026slack,
  title={Heterogeneous Slack: When Uneven Unemployment Gaps Matter for Stabilization},
  author={Pusateri, Nicholas R.},
  journal={Working Paper},
  year={2026},
  url={https://nicpusateri.com/heterogeneous-slack},
  }