This paper estimates the aggregate import demand function for Latin American and Caribbean countries, using the dynamic panel data methods, over the period 1975-2005. Consistent with theoretical postulates, this paper finds that the demand for import responds negatively to an increase in the relative prices and positively to an increase in real income. The results imply that fiscal or monetary policies may be used as policy instruments to keep inflation at a reasonable rate so as to rectify any trade imbalances. In addition, for a sustainable trade balance, the development of more local industries should be encouraged to lower the import content.

The import demand relation is one of the most fundamental relationships among the macroeconomic variables. It is well-documented in trade literature that one of the major concerns in formulating a commercial policy or an exchange rate policy to correct the trade imbalance is the responsiveness of trade flows to relative price changes.

A number of studies have been conducted to empirically investigate the major determinants of import demand behavior in less developed countries as well as developing countries. The conventionally used import demand function relates quantities of import demanded to real income and relative price (ratio of import prices to domestic prices) (Tang, 2002, p. 4).

The primary objective of this study is to estimate the aggregate import demand function for 16 selected Latin American and Caribbean countries, over the period 1975-2005 by using the dynamic panel data methods.

The next section presents recent literature of aggregate import demand studies. Then, the paper provides model specification and data. Subsequently, it describes the econometric methodology used, and reports the results. Finally, it offers the conclusion.

Applied Economics Journal, Empirical Investigation, Monetary Policy, Macroeconomic Variables, Organization of Islamic Conferences, OIC, Gross Domestic Product, GDP, World Development Indicators, WDI, Error Correction Model, ECM, Economic Growth, Regression Analysis, Vector Error Correction Model, VECM.