A FCVAR model for the Central American economy

Resumen

In this article we propose the use of univariate and multivariate fractionally integrated techniques in the analysis of the Central American economy by means of investigating three series (prices, interest rates and monetary base) in a group of the six countries that form the CMCA (i.e., Costa Rica, Honduras, El Salvador, Guatemala, Nicaragua and Dominican Republic). The univariate results indicate that the series are highly persistent with orders of integration close to 1 in the majority of the cases. The main exceptionsare found for the cases of Guatemala, El Salvador and Nicaragua, especially for the monetary base and the interest rate, where mean reversion is found in some cases.  The multivariate results show evidence of one long run equilibrium relationship between broad money, interest rates and inflation for Costa Rica, Honduras, El Salvador and Dominican Republic, and two equilibrium relationships for the remaining countries, i.e., Guatemala and Nicaragua.