This paper analyzes the role and limits of monetary policy in developing economies under conditions of constrained or absent monetary sovereignty, using Puerto Rico as a critical case study. Conventional macroeconomic theory treats monetary policy as a central stabilization tool, yet this presumes institutional capacities such as currency issuance, interest rate control, and lender-of-last-resort functions that many developing or non-sovereign economies lack. As a fully dollarized and non-sovereign U.S. territory, Puerto Rico represents an extreme case in which monetary policy is entirely externalized to the U.S. Federal Reserve, whose decisions reflect mainland economic conditions rather than local needs. The paper contrasts mainstream monetary frameworks, particularly Monetarist and New Keynesian approaches, with heterodox perspectives drawn from Post-Keynesian, Structuralist, Dependency, and Modern Monetary Theory traditions. It argues that orthodox models overstate the benefits of credibility and price stability while understating the economic costs of externally imposed monetary regimes in contexts marked by weak transmission mechanisms, structural unemployment, and fiscal constraint. Using existing empirical evidence, the analysis highlights the asymmetric labor market effects of U.S. monetary policy in Puerto Rico and the limited explanatory power of inflation-focused frameworks. The paper concludes that while Puerto Rico’s stagnation cannot be resolved within its current monetary arrangement, limited policy space exists through institutional innovation, particularly via the strengthening of local financial institutions and development-oriented credit mechanisms, and that non-sovereign economies expose fundamental limits in conventional monetary policy paradigms.
Félix G. Aróstegui-Saavedra (Thu,) studied this question.