Macroeconomic fluctuations, Taylor’s rule, and the dynamics of unemployment and inflation in Puerto Rico

Abstract

This paper study the regional effects of the Taylor rule of the United States on unemployment and inflation in Puerto Rico. Based on the review of the literature, economic theory and the particularities of the economy of Puerto Rico, a theoretical model that bases the construction of a system of autoregressive vectors with the three mentioned variables its created and analyzed. Also examines, through the structural decomposition developed by Blanchard and Quah (1989), the effects of the impulses associated with Taylor's rule of the United States and the local supply and demand in Puerto Rico related to the dynamics of the rates of unemployment and inflation. According to the results, in the short run, unemployment responds mostly to the unanticipated shocks of the monetary policy rule in the United States and the supply shocks. Inflation also responds to this rule and the impulses associated with aggregate demand. In the long run, unemployment is declining, and inflation is accelerating mainly in the face of an unanticipated expansion of US monetary policy caused by the establishment of the Taylor rule. These results are related to the use of monetary rules and their effects at the regional and sectorial levels, as well as the way in which the economic system of Puerto Rico constitutes. The scope of the Taylor rule presents relevant conjectures when analyzing the empirical evidence and represent a contribution in examining the effects of US monetary policy on unincorporated regions and territories.