Inflation Dynamics in the Dominican Republic

This paper investigates the determinants of inflation in the Dominican Republic during 1991-2002, a period characterized by remarkable macroeconomic stability and growth. By developing a parsimonious and empirically stable error-correction model using quarterly observations, the paper finds that inflation is explained by changes in monetary aggregates, real output, foreign inflation, and the exchange rate. Long-run relationships in the money and traded-goods markets are found to exist, but only the disequilibrium from the money market exerts a significant impact on inflation.