Money Demand, PPP and Macroeconomic Dynamics in a Small Developing Economy

José Sánchez-Fung

Studies in Economics from School of Economics, University of Kent

Abstract: This paper aims at improving our understanding of macro-monetary phenomena in developing countries. Specifically, it analyses a six-variable model of the Dominican Republic by implementing the cointegrating VAR framework, using annual data for the period 1950-1999. The inquiry is able to identify 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, generalised 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.

Keywords: Cointegrating VAR; Money demand; PPP; Persistence profiles; Generalised impulse responses; Monetary policy; Dominican Republic (search for similar items in EconPapers)
JEL-codes: E41 E52 F41 (search for similar items in EconPapers)
Date: 2000-12
New Economics Papers: this item is included in nep-ifn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ukc:ukcedp:0015

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