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

Economics Bulletin, Vol 33, Issue 3

11 Pages Posted: 8 Jul 2016

See all articles by Cesar R. Sobrino

Cesar R. Sobrino

Universidad Ana G. Mendez, Recinto de Gurabo

Ellis Heath

Valdosta State University

Date Written: July 25, 2013

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

Sobrino, Cesar R. and Heath, Ellis, Currency Area and Non-Synchronized Business Cycles between the US and Puerto Rico (July 25, 2013). Economics Bulletin, Vol 33, Issue 3, Available at SSRN: https://ssrn.com/abstract=2260787 or http://dx.doi.org/10.2139/ssrn.2260787

Cesar R. Sobrino (Contact Author)

Universidad Ana G. Mendez, Recinto de Gurabo ( email )

PO BOX 3030
PO BOX 3030
Gurabo, 00778
Puerto Rico

HOME PAGE: http://https://sites.google.com/site/crosssec/

Ellis Heath

Valdosta State University ( email )

1500 N Patterson Street
Valdosta, GA 31698
United States

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