The Effects of USA Monetary Policy on Central America and the Dominican Republic

This paper estimates the impact of US monetary policy shocks on Central America and the Dominican Republic economies, using a factor augmented VAR model. A sign restriction approach is implemented for the identification of such shocks. Our results indicate that us monetary policy shocks affect these economies mostly through its effects on the real side of the economy due to its impact on external demand and the reduced role of the exchange rate as a shock absorber, where countries with less flexible exchange rate regimes are more affected. Likewise, the flow of remittances is also negatively influenced, revealing another channel through which foreign monetary shocks impact the Central American and the Dominican Republic economies. On the financial side, domestic interest rates will rise and net international reserves will fall as central banks limit volatility in exchange rates.