Money Demand, PPP, and Macroeconomic Dynamics in the Dominican Republic

The paper analyses a six-variable smallmacroeconometric model for the Dominican Republic by implementing the cointegrating VAR framework. The inquiry identifies money demand and PPP cointegrating relationships that are economically and statistically sensible, displaying half-life persistence profiles of approximately one and three years, respectively. Additionally, generalized impulse response functions observed after shocking the money demand relation suggest that there is scope for activist monetary policy, while those derived from perturbations to PPP show that real exchange rate depreciations generate both contractionary and inflationary developments. Notably, these shocks could also be interpreted as aggregated demand and supply disturbances, respectively. El estudio analiza un modelo macroeconomico compacto para la Republica Dominicana implementando la tecnica de vectores autoregresivos cointegrados. El trabajo identifica cointegracion en las funciones de demanda de dinero y paridad del poder adquisitivo (PPA), siendo las mismas estadistica y economicamente significativas, mostrando patrones de persistencia con vida media de aproximadamente uno y tres anos, respectivamente. Ademas, funciones de respuesta generalizadas obtenidas a partir de choques a la demanda de dinero sugieren que existe la posibilidad de ejecutar una politica monetaria activista, mientras aquellos derivados de la PPA generan patrones de inflacion y contraccion. Notablemente, estos resultados tambien pueden ser interpretados como choques a la demanda y oferta agregadas, respectivamente.