| This dissertation analyzes three specific economic areas of the Dominican Republic for the period 1961-85: the money supply, the demand for money, and the causal relationship between money and nominal income. Throughout the study three different definitions of money (M1, M2, and M3) are analyzed.;The money supply analysis found that the growing government deficit which reached unusually high levels during period 1978-83 produced a significant expansion of the monetary base. At the same time, the country was submitted to strong external shocks that appreciably deteriorated the terms of trade. As a consequence of these internal and external factors, the rate of inflation and the depreciation of the exchange rate accelerated significantly, the international reserves reached an unusually high deficit, and the country faced growing difficulties in meeting the external debt. This critical economic situation led the country to sign an agreement with the International Fund in early 1983.;The study of the demand for money estimated the demand for real money both in the long-run and in the short-run for M1, M2, and M3. The arguments used in the regressions were the real income, the expected inflation, and an institutional change variable--the spread of the banking system.;Three hypotheses were tested in the demand for money: the linear homogeneity, the stability of the function, and the open economy hypothesis. The results support the hypotheses of linear homogeneity and stability but not the open economy.;Causality analysis indicates a causal relationship running from the money supply to nominal income--in the broader definitions of money, M2 and M3--and feedback between those variables in the narrow definition of money, M1. The results of the study suggest that the money stock is an exogenous variable and that M3 is the best definition of money. |
