Impacts of Shocks to U.S. Macroeconomic Variables on the Regional Economy of Georgia

This paper develops a way to analyze a regional economy and a large economy within a model. Using structural autoregression with block exogeneity and mutual independence assumptions as well as Cholesky factorization, we quantify the impacts of shocks to U.S. macroeconomic variables on the regional economy of Georgia. We found that the largest impact on Georgia's aggregate variables - consumer prices, real per capita personal income, and total employment - is the federal funds rate. For other shocks, Georgia's personal income is most affected by an increase in commodity prices, while Georgia's consumer prices are most affected by U.S. inflation. At the industry level, we found that the impact of real GDP is the largest and the impact of M2 is the smallest on output and employment in Georgia's industries, although the magnitude of the impact on employment is smaller and more short-lived than on output.