Heterogeneous Slack: Cross-State Dispersion and the Monetary Policy Response to Unemployment Gaps
The paper lets the unemployment-gap coefficient in Taylor-type rules vary with cross-state dispersion. In a pre-COVID VARX shock replay, dispersion-based attenuation lowers stabilization loss by 4 to 15 percent relative to matched benchmarks and outperforms constant attenuation. The national gap is also less informative about inflation when dispersion is high.