Monetary policy reaction dynamics in a developing economy: evidence for the Dominican Republic

This paper investigates the central bank's behaviour in a developing economy through a nominal monetary policy feedback rule (NFR) that embodies an inflation targeting mechanism. Particularly, the Dominican Republic is modelled by allowing the hypothetical NFR to receive feedback from inflation and exchange rate (market and official rates differential) gaps. The findings show that, on average, an ‘accommodative’ monetary policy was pursued during the period investigated. However, some evidence of monetary tightening in response to adverse developments in the exchange rate indicator is also unveiled.