Determinants of the Dominican Republics Export Demand Function: Results from the Bounds Test for Co-integration

This study presents an empirical examination of the Dominican Republics aggregate export demand function under alternative growth and foreign exchange regimes during the periods of 1960-1984 and 1985-2005. Using the bounds testing approach to co-integration and a method is developed to derive long-run price and income demand elasticities for exports, two export demand functions are estimated and both show the existence of a long-run (co-integrated) relationship between exports, relative prices and foreign income. During the era of inward-oriented growth (1960-1984), the estimated price elasticity of exports has the expected sign and is above unity, indicating that relative prices exerted an above-unity effect on exports. Moreover, the income-demand elasticity is above unity and shows that exports were strongly affected by foreign economic activity. During the era of outward-oriented growth (1985-2005), the price elasticity of demand is below unity and denotes that exports became price inelastic, indicating that devaluation could not be used to increase their growth. However, the income-demand elasticity, though slightly smaller than during the previous period, indicates that total exports continued to be income elastic.