Dominican Republic

Dominican Republic had long pegged its currency 1:1 to the USD, but rising monetary financing and growing controls led to a long period of alternating exchange rate arrangements and gradual improvements in monetary operations. The shift to indirect monetary instruments eventually allowed a transition from 2012 to loosely attained inflation targets.

Years Targets and attainment Classification
1974-81 long-standing 1:1 fix of Dominican peso to USD, limits on access to official forex market and tolerated parallel market with spread of up to 20%; main instrument of monetary policy since 1967 is complex system of basic and marginal reserve requirements more focused on distribution than overall level of credit; banking system, with most banks foreign-owned, dominated by large state-owned commercial bank which is government’s fiscal agent and lends heavily to public sector, but has difficulty meeting its reserve requirements; rising role of nonbank financial intermediaries, and gradual extension of controls to them; largest country in Caribbean but small open economy exposed to sugar and other price shocks and to hurricanes; monetary policy gradually becomes more active, with more rediscounting and more active interest rates; trend of increasing monetary financing of growing fiscal deficits, parallel market spread begins to rise augmented exchange rate fix AERF
1982-2011 access to official forex market reduced, rise in share of transactions in parallel market and in spread, which rises above 25% and peaks at 200% in 1984, rising inflation; initial stabilisation efforts unsuccessful; 1985 exchange rates unified and floated; 1985-90 monetary (but not much fiscal) tightening, with reserve requirements repeatedly changed (but imperfectly enforced), interest rate ceilings raised, central bank certificates issued, controls extended to informal financial institutions; 1987 to 1991 exchange rate arrangements oscillate between dual rates, unified floating and fixed rates; 1990-1 repeated devaluations reduce parallel market spread, exchange rates partially reunified and floated, full programme of fiscal tightening and structural reforms, including unification of reserve requirements and end of interest rate ceilings; 1994 policy slippages including return to dual exchange rates, official and interbank market with small spread (also exchange house market), but late 1994 commitment to adjust official in line with interbank rate; growing role of central bank certificates, mostly 1-year term with limited negotiability, gradual decline in role of reserve requirements; as of 2001 central bank has been using credit ceilings and placing central bank certificates to sterilise excess liquidity, but is now aiming to shift to indirect instruments, with auctions rather than placements, and to unify forex markets; long-delayed new central bank law passed 2002, reinforcing gradual shift in objectives to price stability; financial crisis 2003-4 resulting from discovery of fraud at large bank impedes move to indirect instruments, and weakens capital position of central bank; 2004 basic standing facilities, with wide initial spread reduced to more normal level by 2007; policy focused on managing base money mainly via (primary market) OMOs, with rising interest in inflation targeting; severe shock from GFC 2008-9, but quick monetary response leads to rapid recovery; mid-2000s efforts to develop domestic debt markets and extend yield curve; by mid-2010 some secondary trading in central bank and government paper, clear interest rate corridor from restructured standing facilities and formal policy rate loosely structured discretion LSD
2012-17 narrow inflation targets announced from 2012, though exchange rate still managed; targets attained 2012-13, undershot 2014-16, attained 2017, but expected inflation remains more or less within target range throughout; slow movement towards greater exchange rate flexibility loose inflation targeting LIT

Selected IMF references: RED 1973 pp80-2; RED 1974 pp28-30, 68; RED 1975 pp22-4; SR 1975 p9; RED 1976 pp19-20; SR 1976 p2; RED 1977 pp37-41; SR 1977 pp7-8; SR 1978 pp8-9; RED 1979 pp18, 38-40; RED 1981 p26; SR 1982 p16; RED 1983 pp29, 45-6; RED 1984 pp1-2, 26-7, 43-7; RED 1985 pp1-2, 25-7, 41-4; RED 1987 pp1-2, 25-8, 29-31, 41; RED 1988 pp23-4, 33-7; SR 1988 pp5, 9; RED 1989 pp24-6, 35-9; RED 1991 pp23-5, 34, 37; SR 1992 pp2-4; RED 1993 pp14-15, 21-2; SR 1995 pp7-8, 9; RED 1996 pp19-22; SI 1999 pp8-17; SR 2001 pp17-21; SR 2002 p20; SR 2003 pp6-8; SR 2005 pp20-1; SR 2008 pp12-15, 19-20; SR 2009 pp21-2; SR 2010 pp18, 23; SR 2012 pp6, 12; SR 2016 pp12-13, 19, 25; SR 2017 pp5-7, 13; SR 2018 pp5-6, 13-15, 24.

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