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

9. Unit root tests

10. Cointegration test

11. Vahid and Engle’s (1997) test

12. Robustness

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.