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A Co-integration Analysis of the Dominican Republic‘s Aggregate Import Demand Function under a Floating Exchange Rate Regime

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  • Santiago Grullón

    (NYC & Company Adjunct Professor, Mercy College)

Abstract

This paper presents an empirical examination of the responsiveness of aggregate imports to variations in relative prices and domestic economic activity in the Dominican Republic under a floating exchange rate regime implemented in 1985. Using the „bounds‟ testing approach to co-integration of Pesaran et al. (2001) and a method developed by Bårdsen (1989) to derive long-run price and income elasticities of import demand for the period of 1985-2005, the findings show the existence of a co-integration relationship between imports, relative prices and domestic income. Total imports have a long-run price demand elasticity of -1.61, indicating that relative prices have a strong effect on their demand and thus signifying that the demand for imports is strongly affected by domestic inflationary pressures. Moreover, the long-run domestic income demand elasticity is +1.24, demonstrating that imports are strongly affected by domestic economic activity. This latter result is shown to have important implications for sustainable economic growth in the Dominican Republic, particularly in the light of its recent membership in the Central American Free Trade Agreement (DR-CAFTA).

Suggested Citation

  • Santiago Grullón, 2012. "A Co-integration Analysis of the Dominican Republic‘s Aggregate Import Demand Function under a Floating Exchange Rate Regime," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 282-289, June.
  • Handle: RePEc:asi:aeafrj:2012:p:282-289
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    References listed on IDEAS

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    1. Dilip Dutta & Nasiruddin Ahmed, 2004. "An aggregate import demand function for India: a cointegration analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(10), pages 607-613.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    3. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    4. Tuck Cheong Tang & Mahendhiran Nair, 2002. "A cointegration analysis of Malaysian import demand function: reassessment from the bounds test," Applied Economics Letters, Taylor & Francis Journals, vol. 9(5), pages 293-296.
    5. Naeem Ur Rehman Khattak & Muhammad Tariq, 2012. "Are Real Devaluations Contractionary? an Empirical Analysis for Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(1), pages 119-134, March.
    6. Shyh-Wei Chen, 2008. "Long-run aggregate import demand function in Taiwan: an ARDL bounds testing approach," Applied Economics Letters, Taylor & Francis Journals, vol. 15(9), pages 731-735.
    7. Tsangyao Chang & Yuan-Hong Ho & Chiung-Ju Huang, 2005. "A Reexamination Of South Korea¡¯S Aggregate Import Demand Function: The Bounds Test Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(1), pages 119-128, June.
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    Keywords

    Empirical examination.;

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