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Presentation coidine 2012 cesar sobrino

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César Sobrino
César Sobrino

This document analyzes the business cycle relationship between the US and Puerto Rico using quarterly and annual GDP and economic index data from 1947-2009. It finds that while Puerto Rico and the US do not have a synchronized common business cycle, they do share a non-synchronized "codependent" cycle with a one quarter lag, indicating Puerto Rico's economy is impacted by but does not move in tandem with the US economy. The study has implications for countercyclical monetary policies between Puerto Rico and the US Federal Reserve.

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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 adoption Vahid and Engle (1993)
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
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 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)
CEIs and U. Rates Coincident Economic Indexes Unemployment rates (1992=100) (1976q1-2012q2) (1970q1-2007q2) 5.0 28 4.8 24 20 4.6 12 16 4.4 10 12 8 4.2 8 6 4.0 4 3.8 2 1970 1975 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 2010 Log of CEIUS Log of CEIPR URATEUS URATEPR
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.

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Presentation coidine 2012 cesar sobrino

  • 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)
  • 8. CEIs and U. Rates Coincident Economic Indexes Unemployment rates (1992=100) (1976q1-2012q2) (1970q1-2007q2) 5.0 28 4.8 24 20 4.6 12 16 4.4 10 12 8 4.2 8 6 4.0 4 3.8 2 1970 1975 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 2010 Log of CEIUS Log of CEIPR URATEUS URATEPR
  • 11. Vahid and Engle’s (1997) test
  • 13. Codependent vectors Notes: Standard errors in parentheses.
  • 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.