Heterogeneous Slack: Cross-State Dispersion and the Monetary Policy Response to Unemployment Gaps

Abstract

This paper studies whether cross-state labor-market dispersion changes how strongly policy should respond to the national unemployment gap. In a wide range of representative Taylor-type rules, I allow the unemployment-gap coefficient to vary with a monthly state-level measure of labor market slack dispersion. In a pre-COVID vector autoregression with exogenous variables (VARX)(12) shock replay, dispersion-based attenuation lowers stabilization loss by 4 to 15 percent relative to the matched benchmark in every rule pair. This is not a story of simple attenuation. Mechanism evidence suggests that the national unemployment gap is less informative about inflation when cross-state dispersion is high. These results provide conditional replay evidence for leaning less on a given national gap reading when regional labor-market dispersion is elevated.

Citation

Pusateri, Nicholas R. 2026. “Heterogeneous Slack: Cross-State Dispersion and the Monetary Policy Response to Unemployment Gaps.” Working Paper. URL: https://nicpusateri.com/heterogeneous-slack.

@article{pusateri2026slack,
  title={Heterogeneous Slack: Cross-State Dispersion and the Monetary Policy Response to Unemployment Gaps},
  author={Pusateri, Nicholas R.},
  journal={Working Paper},
  year={2026},
  url={https://nicpusateri.com/heterogeneous-slack},
  }