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Currency Area and Non-synchronized Business Cycles between the US and Puerto Rico

Author

Listed:
  • Cesar Sobrino

    (Universidad del Turabo)

  • Ellis Heath

    (Valdosta State University)

Abstract
Frankel and Rose (1997, 1998) state that greater intensity of trading leads to more highly correlated business cycles across countries. Since 2005 Puerto Rico, which belongs to the US currency area, has suffered from economic stagnation. This raises the issue of whether currency areas lead to synchronized business cycles or not. Following Vahid and Engle (1997), we use a test of codependence to examine the short-run co-movements in outputs and prices between the US and Puerto Rico. The outcomes indicate that both economies share a common non-synchronized business cycle. The response from Puerto Rico to temporary US shocks occurs at a lag of one quarter. In addition, Puerto Rican prices respond to temporary shocks to US prices with a lag of two quarters. Furthermore, the forecast error variance decomposition shows that the Puerto Rican economy is highly dependent on the US economy. All evidence suggests that currency areas do not lead to synchronized business cycles. However, even though Puerto Rico has a non-synchronized common cycle with the US, the results appear to be that the current economic struggle in Puerto Rico is a long-term one, instead of a short-term one.

Suggested Citation

  • Cesar Sobrino & Ellis Heath, 2013. "Currency Area and Non-synchronized Business Cycles between the US and Puerto Rico," Economics Bulletin, AccessEcon, vol. 33(3), pages 1948-1958.
    • Handle: RePEc:ebl:ecbull:eb-12-00751
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Cesar Sobrino, 2022. "The persistence of regional disparities in labor markets: Evidence from Puerto Rico," Economics Bulletin, AccessEcon, vol. 42(4), pages 1728-1741.

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    More about this item

    Keywords

    Time Series Models; Business Cycles; International monetary arrangements; and Institutions.;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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