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Determinants of Economic Growth in the Dominican Republic

This study investigates the factors driving economic growth in the Dominican Republic. The results provide valuable insights for policymakers to design effective strategies for promoting sustainable growth.

Domestic Leverage: A Key Driver of Growth

Strong and significant impact: Domestic leverage has the strongest and always significant impact on growth at all three horizons (h=4, 8, and 12).
Negative sign indicates higher availability of private sector credit is associated with higher economic growth.
Credit crunch would have a strong and prolonged negative impact on domestic growth: A decline in the availability of credit to the private sector can lead to significant economic downturns.

External Demand: An Important Factor of Growth

Second most important factor of growth: External demand is the second most important factor driving growth in the Dominican Republic.
Strongest impact at medium- and long-term horizons (h=8 and 12): Favorable external demand conditions have a strong positive impact on the domestic economy, particularly at longer horizons.
Decline in external demand can create negative impact: A decline in external demand could lead to negative impacts on local growth.

External Liquidity: Limited Impact

Does not have significant impact on growth at any horizon: External liquidity does not appear to play a significant role in driving economic growth in the Dominican Republic.

Domestic Financial Conditions: Tradeoff between Short-Run Stimulus and Long-Run Vulnerabilities

Significant impact only when growth is below average (q=0.1, 0.25, and 0.5): Domestic financial conditions are important for growth only during periods of below-average growth.
Tradeoff between short-run stimulus and long-run vulnerabilities: Expansionary monetary policy can create long-run vulnerabilities that amplify shocks in bad times.

Key Findings and Policy Implications

Domestic leverage has a strong and significant impact on growth at all horizons.
External demand is an important factor of growth, particularly at medium- and long-term horizons.
Domestic financial conditions are important for growth only when it’s below average, and there’s a tradeoff between short-run stimulus and long-run vulnerabilities.

These findings highlight the importance of maintaining a stable financial system, managing external demand, and implementing monetary policy that balances short-term stimulus with long-term sustainability for policymakers in the Dominican Republic.