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Monetary Policy Effects in Output and Prices: Evidence for the Dominican Republic using a Structural VAR approach

Jiménez Polanco, Miguel Alejandro and Paredes Encarnación, Evelio and Ramírez de León, Francisco (2014): Monetary Policy Effects in Output and Prices: Evidence for the Dominican Republic using a Structural VAR approach. Published in: Documento de Trabajo Banco Central de la República Dominicana No. 2014-02 (15 May 2014)

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Abstract

In this paper we provide new evidence of the transmission mechanism of monetary policy in Dominican Republic using a Structural Vector Autoregressive methodology where we incorporate carefully a set of constraints on contemporary relationships composed of domestic and external variables. Using the model, we estimate the responses of CPI inflation and GDP growth, as well as money demand and the real exchange rate, to exogenous movements in monetary policy. In quantitative terms, an innovation of monetary policy has an effect on growth from the second month and runs for one year. In the case of inflation, the effects begin to be observed from the fifth month after the monetary shock occurred, with an average duration of two years. These responses are in line with economic theory in qualitative terms, and we do not observe the existence of any of the economic puzzles.

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