The Effects of U.S. Monetary Policy on Colombia and Panama (2002-2007)

Abstract

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 a different exchange rate regime. If these distortions bear enough weight, then economies with different exchange rate regimes include a common factor that causes their business cycles to appear similar, despite the conventional prediction which focuses on exchange rate as a transmission mechanism or moderator of a monetary shock.

Keywords: capital structure, foreign exchange rate, business cycle, small open economy, crisis contagion

JEL Classification: E32, E52, F21, F41