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 VAR 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 VAR 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.

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