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The impact of US monetary policy on small and dollarized economies: the case of Puerto Rico

Author

Listed:
  • Emanuelle A. Alemar Sanchez

    (Economist, Abexus Analytics. Puerto Rico)

  • Carlos A. Rodriguez Ramos

    (Universidad de Puerto Rico. Puerto Rico)

Abstract

Objective: develop an econometric model to estimate the impact of U.S. monetary policy on small and dollarized economies, considering the main variables influencing the decisions of the U.S. central bank, and apply this model to the case of Puerto Rico.Methodology: we specify a restricted VA R model, derived from a theoretical model of the relationship between the U.S and Puerto Rico economies.Results: results show that interest rate increases can explain a considerable variation in Puerto Rico unemployment, but not in inflation.Limitations: non-linear effects are not accounted for.Originality: a novel VA R model is specified, distinguishing itself from other models by its matrix of restrictions that describe the unidirectional relationship between the economies of the United States and Puerto Rico, the inclusion of interest rates at different maturities, and key variables that determine interest rate decisions to study the impact of U.S. monetary policies on dollarized economies.Conclusions: it is important to consider the relationship between dollarized economies and U.S. economy, incorporating constraints that describe it, as well as the variables affecting central bank decisions and expectations, as well as to explore complementary policies to mitigate the negative effects of tightening monetary policy on the labor market.

Suggested Citation

  • Emanuelle A. Alemar Sanchez & Carlos A. Rodriguez Ramos, 2025. "The impact of US monetary policy on small and dollarized economies: the case of Puerto Rico," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 22(2), pages 7-36, July-Dece.
    • Handle: RePEc:qua:journl:v:22:y:2025:i:2:p:7-36
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    Keywords

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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