Price and Income Elasticities of Disaggregated Import Demand: Bounds Test Results for the Dominican Republic

Abstract

This paper presents an empirical examination of the import demand for services, merchandise, petroleum, and other products in the Dominican Republic during the period of 1980-2005. Using the ‘bounds’ testing approach to co-integration of  Pesaran et al. (2001),  four import demand functions are estimated and all show the  existence of a long-run equilibrium relationship between imports, relative prices and domestic income. These imports have long-run price demand elasticities below unity, indicating that relative prices have no  effect on their demand. On the other hand, all the long-run domestic income demand elasticities are significantly above unity, demonstrating that imports are strongly affected by domestic economic activity. These results are shown to have important implications for sustainable economic growth in the Dominican Republic, particularly in the light of its recent membership in the Central American Free Trade Agreement (DR-CAFTA).