The effects of U.S. monetary policy on Colombia and Panama (2002–2007)

Abstract

• I study international effects on two small economies with different forex regimes. • I study how these two economies react to US monetary policy. • Relative capital intensive sectors are more sensitive to US monetary policy. • This common characteristic can explain business cycle co-movements. I study the economies of Colombia (floating exchange rate) and Panama (dollarized) to illustrate how the monetary policy of a large economy can export capital structure distortions to small open economies that follow different exchange rate regimes. The paper contributes to the literature on international business cycles in two ways. First, it adds to recent research that extends the Mises–Hayek business cycle theory to an international context. Second, most current research abstracts from effects on the production structures of emerging market economies when analyzing the transmission of monetary policy shocks. This paper seeks to fill this gap by studying structural effects of U.S. monetary policy on the economies of Colombia (floating exchange rate) and Panama (dollarized).