Effectiveness and Transmission Mechanisms of Monetary Policy in the Dominican Economy

In this study we review empirical effectiveness and transmission mechanisms of monetary policy in the Dominican economy for the period 1991 to 2005. After completing a review of the literature on the factors that influence that monetary policy is effective and transmission mechanisms through which impulses are filtered on inflation and economic activity, we use models of Multivariate Time Series (Vector Autoregressive transformed by the Error Correction Mechanism) to determine the interdependent dynamics, the effects of different shocks in the economy, and the most important transmission mechanisms, using different indicators of money and credit on a quarterly basis.According to the results of this methodology, we confirm that the Dominican economy is not detected neutrality of money in the short term, since monetary shocks drive real economic activity and do not necessarily translate into inflation as traditional monetarist doctrine argue. Moreover, empirically reveal that inflation is endogenous to monetary policy than the actual product, which validates the fact that the Central Bank to focus on price stability objectives rather than actual production. Furthermore, we conclude that the most important transmission mechanism in the Dominican economy is the nominal exchange rate, which has the power to influence the inflation forecast and the actual product (besides the large pass-through estimate); Although the design and conduct of monetary policy should not neglect other mechanisms, such as the nominal interest rate and monetary aggregates, which also play a significant role, but smaller, in forecasting real GDP and inflation