Dominican Republic faces monetary policy trade-off – IMF paper

A paper published by the International Monetary Fund examines the policy choices faced by the Central Bank of the Dominican Republic.

In the paper, Olga Bespalova and Marina Rousset use the IMF’s “growth-at-risk” model to examine how macro-financial conditions affected GDP in the Dominican Republic from 1996–2018.

They say that the financial system is healthy by international comparison. But they warn that the central bank faces a trade-off between the short- and medium-term effects of monetary policy. When growth is below trend, a monetary expansion “would stimulate the economy at a one-year horizon but would have a contractionary impact at a three-year horizon”, they find.

“Our findings show that domestic monetary policy plays a particularly important role in reducing growth vulnerabilities when the economy is weak,” they say.

The key external risk to the economy’s growth outlook stems from demand conditions, they say. “The authorities should be cautious of low-growth prospects in the US and the euro area, and worsening terms of trade and competitiveness,” they say.

Over a longer-term horizon, external borrowing costs could have a “significant” impact on the growth prospects of the economy, they add.