Economic Growth in the Dominican Republic: The Role of Leverage and External Demand

A recent study has shed light on the key drivers of economic growth in the Dominican Republic, revealing that domestic leverage and external demand play a crucial role in shaping the country’s economic trajectory.

Domestic Leverage: A Strong Positive Impact

The research found that a higher availability of private sector credit has a strong and significant positive impact on economic growth. This is evident across all three horizons analyzed:

• Short-term (h=4): A negative sign indicates that a credit crunch would have a strong and prolonged negative impact on domestic growth.
• Medium-term (h=8) and long-term (h=12): The study shows that higher domestic leverage has the strongest and most consistent impact on growth.

External Demand: A Significant Factor

External demand was found to be the second most important factor driving economic growth, with its strongest impact felt at the medium- and long-term horizons:

• Favorable external demand conditions have a strong positive impact on the domestic economy.
• A decline in external demand can create a negative impact on local growth.

Domestic Financial Conditions: A Tradeoff

The study also highlights that domestic financial conditions have a significant impact on the economy only when growth is below average. There appears to be a tradeoff between the economic stimulus created in the short run and the economic vulnerabilities created by financial easing in the long run:

• Loose monetary conditions can have an expansionary impact on the domestic economy in times of low growth.
• However, this expansionary policy can create long-run vulnerabilities that can amplify shocks in bad times.

Policy Implications

The research suggests that policymakers must balance their approach to stimulate the economy while minimizing potential risks. The central bank has significant power to stimulate the economy, but must be mindful of these potential risks and consider a well-balanced economic policy mix that takes into account both domestic and external factors.

Conclusion

By understanding the complex relationships between domestic leverage, external demand, and financial conditions, policymakers can make more informed decisions to promote sustainable economic growth in the Dominican Republic. The study highlights the importance of a balanced approach that considers both short-term and long-term implications of economic policy decisions.