The Codependent Cycle between the US and Puerto Rico

By César R. Sobrino - Universidad del

Turabo& Ellis Heath – Valdosta University

Motivation

• According to Mundell (1961), for optimum currency areas, economies should have synchronized common cycles.

• According to Frankel and Rose (1997;1998), trade intensity and synchronicity of business cycles are endogenous.

• This statement raises the issue whether currency areas lead to synchronized business cycles. – Data of Puerto Rico is relevant.– Puerto Rico belongs the US currency area.

Objectives

• Find a common cycle between US output and PR output.– A sychronized common business cycle.– A non-synchronized common business

cycle.– Using Vahid and Engle’s (1997) test

• Policy implications about findings.

Previous literature

• Frankel and Rose (1997, 1998), Calderon, Chong and Stein (2007); Artis, Chouliarakis, Harischandr (2011); Bordo and Hiebling (2011); Artis and Okubo (2011); Inklaar, Jo-A-ping and de Haan (2008); Shin and Wang (2003); Rose (2008) for EMU; and, De Pace (2011).

• Herrera (2003)Mexico and US share a common trend and common cycles since NAFTA adoptionVahid and Engle (1993)

Common feature literature

• For stationary series– Engle & Kozicki (1993)

• For non-stationary seriesConditional to cointegration– Vahid & Engle (1993)-Common cycle– Vahid & Engle (1997)- Codependent

cycle

Methodology & Data

• VECM• Vahid and Engle’s (1997) statistic• Data:

– Fed St. Louis, US RGDP (annual)– Conference Board: US CEI (quarterly)– Junta de Planificacion: RGDP (annual),

CEI (quarterly).– Bureau of Labor Service (BLS): both

unemployment rates- quarterly series

Real GDPs

20

21

22

23

24

28.0

28.5

29.0

29.5

30.0

30.5

50 55 60 65 70 75 80 85 90 95 00 05

US RGDP in logs (right-hand side)PR RGDP in logs (left-hand side)

Shortcoming: Annual and fiscal year

1947-2009

CEIs and U. Rates

3.8

4.0

4.2

4.4

4.6

4.8

5.0

1970 1975 1980 1985 1990 1995 2000 2005

Log of CEIUS Log of CEIPR

2

4

6

8

10

12

8

12

16

20

24

28

1980 1985 1990 1995 2000 2005 2010

URATEUS URATEPR

Coincident Economic Indexes (1992=100)

(1970q1-2007q2)

Unemployment rates(1976q1-2012q2)

Unit root tests

Cointegration test

Vahid and Engle’s (1997) test

Robustness

Codependent vectors

Notes: Standard errors in parentheses.

Conclusions

• US and Puerto Rico outputs share a non synchronized common cycle. Codependency at one quarter.

• Compared to Mexico, PR is less integrated to the US in the short run.– Merchant Act (Jones Act)

• Look for some monetary mechanism with NY Fed for smoothing GDP falls (countercyclical monetary policies).

References

• Frankel, J.A., Rose, A.K., 1997. Is EMU more justifiable ex post than ex ante? European Economic Review, 41, 753-760 

• Frankel, J.A., Rose, A.K., 1998. The Endogeneity of the Optimum Currency Area Criteria, The Economic Journal, 108, 1009-1025.

• Engle, R. and S. Kozicki (1993) “Testing for Common Features”, Journal of Business and Economic Statistics 11: pp. 369-396.

• Herrera, Jorge (2004) Business Cycles in Mexico and The United States: Do They share common movements? Journal of Applied Economics, Vol. VII, No. 2, 303-323

• Mundell, R. (1961) Optimun currency areas, American Economic Review, 51, 667-655.

• Vahid, F & Engle, R. (1993). "Common Trends and Common Cycles," Journal of Applied Econometrics, vol. 8(4), pages 341-60,

• Vahid, F. and R. Engle (1997), “Codependent Cycles”, Journal of Econometrics 80: 199-221.