The Influence of U.S. Monetary Policy Uncertainty and Inflation Expectations on the Economy of Puerto Rico: Insights from a VAR Model

This paper investigates the relationship between Puerto Rico’s Headline CPI Inflation Rate, Unemployment Rate, U.S. monetary policy uncertainty, and inflation expectations using a VAR model based on the methodology of Toda and Yamamoto (1995), covering the period 1985–2024. Results reveal bi-directional Granger causality between Puerto Rico’s macroeconomic indicators and U.S. inflation expectations, but not with monetary policy uncertainty. Impulse responses and variance decompositions highlight the significant influence of U.S. inflation expectations on Puerto Rico’s inflation and unemployment. The findings underscore the island’s macroeconomic sensitivity to U.S. expectations.