Modelling the term structure of interest rates in a small emerging market economy

This paper investigates the term structure of interest rates in a small emerging market economy - the Dominican Republic. The modelling finds a significant dynamic link amongst the day-to-day interbank interest rate and a representative banking system interest rate. But the interbank rate's forecasting power breaks down in the aftermath of the 2003 banking crisis. This episode illustrates how the monetary authorities' credibility with the public and market expectations affect the term structure's reliability.