Money Demand in a Dollarizing Economy: The Case of the Dominican Republic


This paper investigates money demand in the Dominican Republic. The study employs monthly economic time series covering a period of stabilization and rapid economic growth alongside financial dollarization. The analysis reveals meaningful long-run relations for narrow and for broad monetary aggregates. Importantly, the study argues that the broad money demand function's peso-dollar interest rate differential coefficient could be capturing financial dollarization. However, short-run modeling unveils coefficient instability, and that could jeopardize money demand's traditional role in designing and executing monetary policy.