Lags from money to inflation in a monetary integrated economy: Evidence from the extreme case of Puerto Rico

Abstract

This paper examines the time-lenght of money growth's long and short run effect in affecting the rate of inflation in the context of an economy of extreme monetary integration. Money growth is measured as the rate of growth of Puerto Rico's consumer price index. By analyzing the case of Puerto Rico, we find that a dynamic expansion of money is reflected on prices immediately, but the unitary effect occurs approximately within ten quarters. In addition, the results show that local inflation is significantly influenced by its own past history and monetary policy, with the second having the greater effect.