1. The Codependent Cycle
between the US and Puerto Rico
By
César R. Sobrino - Universidad del
Turabo
& Ellis Heath – Valdosta University
2. 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.
3. 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.
4. 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 adoption
Vahid and Engle (1993)
5. Common feature literature
• For stationary series
– Engle & Kozicki (1993)
• For non-stationary series
Conditional to cointegration
– Vahid & Engle (1993)-Common cycle
– Vahid & Engle (1997)- Codependent cycle
6. 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
7. Real GDPs
1947-2009
30.5
24
30.0
23
29.5
22
29.0
21 28.5
28.0
20
50 55 60 65 70 75 80 85 90 95 00 05
Shortcoming: Annual and fiscal year side)
US RGDP in logs (right-hand
PR RGDP in logs (left-hand side)
14. 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).
15. 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.