Which has Higher Real Effects on an US Unincorporated Territory, The Price of Crude Oil or the Monetary Policy?

Evidence Fron the Case of Puerto Rico

Abstract

Puerto Rico is an unincorporated territory of the United States of America. As part of the political-economic arrangement between both political entities, Puerto Rico does not control the local price of oil because it does not have domestic sources of oil, and it does not control its monetary policy, as that is a right reserved by the U.S. Federal Reserve System.  This paper investigates the impacts of exogenous shocks of oil price and monetary policy on the Economic Activity Index, Puerto Rico Consumer Price Index, total non-farm employment, electricity consumption, gasoline consumption, and cement sales. Impulse response functions are used to study the oil price and monetary policy shocks. The oil price shock had a more significant effect on gasoline consumption than on electricity consumption. Monetary policy shocks had a higher magnitude on electricity consumption than on gasoline consumption. The monetary policy and oil price shock had minimal effect on the aggregated endogenous variables, Economic Activity Index, and Puerto Rico Consumer Price Index. This study suggests that individuals in Puerto Rico are vulnerable to a volatile oil market. Also, both exogenous variable shocks had minimal impact on employment. As for future steps, it would be prudent to investigate the effect of both exogenous variables on individual employment sectors, not aggregated. Besides, the government of Puerto Rico should develop policies to minimize the effect of oil price shocks.