Exchange market pressure (EMP) is defined as the sum of exchange rate depreciation and outflows of official international reserves. This chapter addresses several issues regarding EMP, monetary policy, and interest rates in the Dominican Republic. First, domestic monetary policy, measured by the growth of net domestic assets of the central bank, explains a substantial portion of EMP in the Dominican Republic. Second, to help accumulate reserves (or reduce EMP), domestic monetary policy is an effective policy tool All else equal, a monetary contraction today should stimulate a reserve inflow of a comparable magnitude. Third, reductions in EMP were associated with declines in the differential between domestic and foreign interest rates (albeit with a short lag), possibly reflecting increased investor confidence.

Abstract

Exchange market pressure (EMP) is defined as the sum of exchange rate depreciation and outflows of official international reserves. This chapter addresses several issues regarding EMP, monetary policy, and interest rates in the Dominican Republic. First, domestic monetary policy, measured by the growth of net domestic assets of the central bank, explains a substantial portion of EMP in the Dominican Republic. Second, to help accumulate reserves (or reduce EMP), domestic monetary policy is an effective policy tool All else equal, a monetary contraction today should stimulate a reserve inflow of a comparable magnitude. Third, reductions in EMP were associated with declines in the differential between domestic and foreign interest rates (albeit with a short lag), possibly reflecting increased investor confidence.

VI. Exchange Market Pressure, Monetary Policy, and Interest Rates: Recent Evidence from the Dominican Republic70

A. Introduction

126. Recently, the authorities of the Dominican Republic have permitted more exchange rate flexibility while attempting to increase gross official reserves. Under a managed float, as in the Dominican Republic, in assessing the stance of monetary policy, it is inappropriate to examine either of these variables (exchange rate and reserve changes) in isolation. Instead, exchange rate and reserve movements should be combined to form a measure of exchange market pressure (EMP).

127. Under a managed float, contractionary monetary policy should, all else equal, attract capital inflows (raising official reserves) and increase the value of the Dominican peso, thereby reducing EMP. However, over time, lower EMP should increase investor confidence and ultimately put downward pressure on the differential between domestic and foreign interest rates.

128. This chapter examines several questions related to monetary policy and EMP in the Dominican Republic:

  • First, according to the historical record, does monetary policy affect EMP in the way that standard monetary frameworks would predict? For example, has contractionary monetary policy been successful in either defending the peso or increasing international reserves?

  • Second and closely related, how should the stance of monetary policy be measured? While most recent work uses an interest rate as the policy variable, this chapter emphasizes changes in the domestic credit component of the monetary base, as in the traditional monetary approach to the balance of payments.

  • Third, is the interest rate differential itself a function of EMP? Does lower EMP boost investor confidence and thus reduce the interest rate differential?

  • Fourth, is the stance of monetary policy itself a function of EMP? Do the monetary authorities respond to changes in EMP with monetary expansions or contractions? Do the monetary authorities systematically sterilize changes of EMP with changes in domestic credit, as in several other emerging markets?71

129. To address such questions, this chapter develops a vector autoregression (VAR) framework with three variables, namely EMP, domestic credit growth, and the interest rate differential.72

This methodology is well suited to address the above questions since it:

  • pinpoints ‘shocks’ or ‘innovations’ to the variables mentioned above;

  • estimates the responses to shocks between these variables, both contemporaneously and on a lagged basis; and

  • summarizes how monetary policy (as measured by domestic credit growth) responds to lagged changes in either EMP or the interest differential.

130. Several policy-relevant conclusions (with numerical estimates) will be presented.

  • First, the growth of central bank credit (scaled by base money) is a good indicator of the stance of monetary policy in the Dominican Republic.

  • Second, monetary policy affects EMP significantly and in the direction predicted by theory. For example, a tightening of monetary policy, i.e., a reduction in central bank credit growth, reduces EMP, both immediately and, to a lesser degree, within a one- to five-month period.

  • Third, domestic monetary policy had an ambiguous effect on the interest differential. Contractionary (expansionary) monetary policy is generally associated with interest rate increases (decreases). However, an effect in the opposite direction can also occur, since monetary expansions (contractions) can raise (lower) inflation expectations and cause interest rates to rise (fall). Moreover, reductions in EMP were associated with a lagged reduction in the interest rate differential, possibly reflecting increased investor confidence.

131. The rest of this chapter is organized as follows. Section A introduces the idea of EMP in a monetary framework and presents an overview of the data. Section B develops a vector autoregression (VAR) model. Section C presents the empirical estimates. Finally, section D summarizes the results and presents some policy implications.

B. Exchange Market Pressure (EMP) in the Dominican Republic: An Overview

132. Prior to 1991, the Dominican Republic fixed the official exchange rate,73 but devalued periodically. In late 1991, the authorities abandoned the fixed peg in favor of smaller, more frequent exchange rate movements. While the exchange rate has never floated freely, it has become more flexible in recent years. Between January 1992 and August 1994 monthly exchange rate depreciation averaged 0.15 percent. Subsequently, average monthly exchange rate depreciation was 0.35 percent, mainly reflecting devaluations in 1997 and 1998.

133. Under such a managed exchange rate regime, exchange market pressure (EMP) is reflected in both exchange rate and reserve movements. Girton and Roper (1977) showed that EMP is the flow excess supply of money. To see this, consider the following simple monetary model. On the demand side, the growth of real base money (mt) is:

mt=ΔMt/Mt1πt(1)

where Mt is nominal (base) money at time t and πt is the inflation rate (πΔPt/Pt−1, where Pt is the price level at time t). The inflation rate is linked to foreign inflation πt* through the rate of growth of the nominal exchange rate et:

et=πtπt*+zt(2)

where zt is the deviation from purchasing power parity.

134. On the supply side, the two components of nominal base money are international reserves Rt and net domestic assets Dt. Thus,

ΔMt/Mt1=(ΔRt+ΔDt)/Mt1=rt+δt(3)

where rt = ΔRt/Mt−1 and δt = ΔDt/Mt−1. The above equations restate the traditional monetary approach. Assuming that purchasing power parity holds and foreign inflation equals zero (zt = πt* = 0), substitute (2) and (3) into (1) and rearrange to obtain an expression for EMP:

etrt=δtmt(4)

135. According to equation (4), exchange rate depreciation plus reserve outflows (scaled by base money) equals the difference between the growth rates of the domestic component of the monetary base (δt) and money demand (mt).74 Under a fixed exchange rate regime, et = 0; with freely floating exchange rates, rt = 0.75

136. Table 1 and Figure 1 present data on EMP, exchange rate growth, gross international reserves, and the interest rate differential in the Dominican Republic for the period 1992–98 and selected subperiods.76 These data show that EMP in the Dominican Republic primarily represents reserve movements rather than exchange rate depreciation. The data also suggest that EMP is higher in the early years of the decade than subsequently. Severe pressures, associated with an electoral campaign, occur between August 1993 and August 1994. During this period gross reserves fell by about US$440 million (from about US$640 million to just under US$200 million), and EMP averaged over 3 percent per month, peaking at 13 percent in August 1994 (compared with an average of less than 1 percent for the 1990–98 period as whole). Thereafter, EMP falls and becomes less variable, despite devaluations in 1997 and 1998.

Table 1.

Dominican Republic: Exchange Market Pressure and Related Variables

(Period averages, in percent)

article image
Sources: Central Bank of the Dominican Republic; and Fund staff estimates.Notes: 1. EMP is defined as exchange rate depreciation plus change in international reserves divided by monetary base. 2. Interest rate differential (φ) is domestic currency deposit rate minus U.S. (Libor) rate (3-month). 3. Credit variable (δ) is change in central bank credit divided by the monetary base. EMP and 8 are percent per month; interest rates are percent per year.
Figure 1.
Figure 1.

Dominican Republic: EMP, Credit Growth (δ) and Interest Rate Differential (φ)

(In percent)

Citation: IMF Staff Country Reports 1999, 117; 10.5089/9781451811285.002.A006

Sources: IMF, International Financial Statistics; and Fund staff estimates.

137. A key determinant of EMP is δt, the growth of the domestic component of the monetary base. If monetary policy is expansionary (δt > mt), EMP will rise (through some combination of reserve movements and exchange rate depreciation). In the Dominican Republic EMPt and δt appear to move together. A positive correlation between EMPt and δt is indicated both by visual inspection (see Figure 1, top) and a simple univariate regression (t-statistics in parenthesis):77

EMPt=0.24(0.57)+0.648δt(4.17)(5)

R2(adjusted) = 0.17

Durbin-Watson Statistic = 2.09

138. Note that the coefficient on δt statistically differs from zero at the 99 percent level. Presumably, there should also be a relationship between lagged δ and EMPt. However, the regression above examines only the contemporaneous relationship between δt and EMPt. (The relationship between δ and EMP over time is explored in the next section.) According to the adjusted R2 statistic, on a contemporaneous basis alone, 17 percent of EMP is explained by movements in δt.

139. This finding suggests that δ is an appropriate measure of the stance of monetary policy. However, in much recent work on monetary policy, many authors have used an interest rate, rather than a monetary aggregate like δ, to gauge the stance of monetary policy.78 For a small relatively open economy like the Dominican Republic, the differential between domestic and foreign (United States) interest rates φt conveys important information: it indicates both expected exchange rate depreciation and a premium required to satisfy the marginal investor. Thus, all else constant, an increase in φt (due to contractionary monetary policy) encourages capital inflows and reduces EMP. In theory, the relationship between φ and EMP is ambiguous. On the one hand, an increase in φt may signal anticipated exchange rate depreciation (a Fisher effect) and/or higher risk, reflecting loose monetary policy. In the Dominican Republic, casual inspection suggests that, unlike δt, φt does not appear to be closely correlated with EMPt, either visually (see Figure 1) or in bivariate regressions.79

C. EMP and Monetary Policy: A Vector Autoregression Approach

140. As discussed above, one question that this chapter seeks to answer is whether monetary policy in the Dominican Republic affects EMP in the direction predicted by standard monetary theory. In this section, a vector autoregression (VAR) framework is developed to address this question.

141. Consider the following vector autoregression (VAR) system:

Xt=a0+a1Xt1+a2Xt2+....+vt(6)

where X = (δ, EMP, φ) is a matrix of variables, ai is a vector of coefficients, and vt = (v δ, vE, vφ) is a vector of error terms.80 A system like (6) permits testing for effects of past values of X on current values. Assumptions regarding the exogeneity of certain variables (like a policy variable) are easily incorporated into a system like (6). To do so, first assume that each element of the error vector vt is in turn composed of “own” error terms wt = (wδ, wE, wφ) and contemporaneous correlations with “other” errors. That is:

vt=Bwt(7)

where B is a 3 x 3 matrix whose diagonal elements (“own correlations”) equal one and whose nonzero off-diagonal elements reflect contemporaneous correlations among the error terms. Now, assumptions regarding the exogeneity of certain variables may be incorporated in restrictions on the matrix B.81

142. As discussed above, the domestic credit growth variable δ is assumed to be exogenous. That is, in any period, innovations to δ (i.e., vδ) reflect only the tastes and preferences of the policymaker:

vδt=wδt(8)

143. Next, shocks to exchange market pressure (vE) contain two elements: the “own” shock (wE) plus one related to innovations in domestic credit:

vEt=wEt+b21wδt(9)

144. Thus, wE may be thought of as a shock to the demand for a country’s currency, due perhaps to changes in investor confidence and sentiment. Thus b21 wδt represents the portion of shocks to EMP that is contemporaneously correlated with domestic credit growth.

145. Finally, shocks to the change in the interest rate differential (wφ) is the sum of three elements: the “own” shock (wE) plus ones related to innovations in domestic credit and EMP:

vφt=wφt+b31wδt+b32wEt(10)

146. According to equation (10), innovations to domestic credit wδ affect the interest rate differential through either standard liquidity or Fisher channels. (Thus, the predicted sign of b31 is ambiguous.) Second, the interest rate differential should respond to changes in EMP: a rise in EMP may signal either further exchange rate depreciation in the future, or additional risk, or both. Such effects are captured in the term b32wEt and b32 should be greater than zero. The “own” shock wφ thus contains other factors not contained in either wδ or wE. This component should be thought of as a “hybrid” that potentially contains both policy- and market- determined elements.82

147. In addition to the contemporaneous relationships shown in equations (8)–(10), impulse response functions (IRFs) summarize the effect of past innovations (i.e., lagged elements of w) to current values of X. Thus, IRFs provide two additional ways to evaluate the effect of monetary policy on EMP. First, IRFs show effects on EMP of both current and past innovations to domestic credit (wδ). Second, IRFs also show effects on EMP of past (but not current) innovations to the interest rate differential (wφ). But, this latter IRF may only be thought of as a policy relationship insofar as innovations to the interest rate differential represent policy shocks. (Note also that IRFs show effects on Δφ of both current and past innovations to domestic credit and EMP, (wδ) and (wE), respectively.)

148. However, the framework discussed above also helps address the chapter’s third main question, namely how the stance of monetary policy is determined. Specifically, the IRFs provide a policy reaction function: they show effects on current δ of past (but not current) innovations to EMP (wE) and changes in the interest rate differential (wφt).83 For example, when faced by positive innovations to EMP (for example, a decrease in investor confidence) policymakers may respond “prudently” with contractionary policy (reducing δ). However, policymakers might face pressures to act otherwise. For example, when EMP rises, the authorities might also face pressures to provide liquidity to the domestic financial system (raising δ). Such a response, in the context of balance of payments crises and speculative attacks, is discussed in several papers, including Flood, Garber, and Kramer (1996) and Calvo and Mendoza (1996).

D. Estimation Results

149. Estimation results are presented in Table 2, Part A. These include adjusted R-squared statistics, exclusion (Granger causality) tests, and IRFs. Also, IRFs are presented graphically in Table 2, Part B, and Figures 2 through 4.

Table 2.

Dominican Republic: Summary of Estimates, Vector Autoregression System Equation (6)

1992 - 1998 (Monthly Data)

(6)Xt=a0+a1Xt1+a2Xt2+....+vt,X=(δ,EMP,Δφ)

article image
Sources: Central Bank of the Dominican Republic; and Fund staff estimates.Note: For all estimates, 4 lags are used. P-statistics in parentheses. δ = growth of domestic credit (scaled by base money). EMP = exchange rate depreciation plus reserves loss (scaled by base money), Δφ = change in interest rate differential.
Figure 2.
Figure 2.

Dominican Republic: Response of EMP to Shocks 1/

Citation: IMF Staff Country Reports 1999, 117; 10.5089/9781451811285.002.A006

Sources: IMF, International Financial Statistics; and Fund staff estimates.1/ Dotted lines represent plus or minus two standard errors.
Figure 3.
Figure 3.

Dominican Republic: Response of Interest Rate Differential (Δφ) to Shocks 1/

Citation: IMF Staff Country Reports 1999, 117; 10.5089/9781451811285.002.A006

Sources: IMF, International Financial Statistics; and Fund staff estimates.1/ Dotted lines represent plus or minus two standard errors.
Figure 4.
Figure 4.

Dominican Republic: Response of Credit Growth (δ) to Shocks 1/

Citation: IMF Staff Country Reports 1999, 117; 10.5089/9781451811285.002.A006

Sources: IMF, International Financial Statistics (IFS); and Fund staff estimates.1/ Dotted lines represent plus or minus two standard errors.

150. Importantly, estimates confirm that shocks to domestic credit growth (wδ) affect EMP positively, as expected. As Table 2, Part A shows, the hypothesis that lagged δ does not help explain current EMP is not rejected at conventional levels. Nonetheless (see table 2, part B, and Figure 2, top) the current period (period 0) IRF is positive and significantly different from zero at the 99 percent level.84 The results suggest that, contemporaneously, a 1 percent increase (decrease) to domestic credit causes EMP to increase (decrease) by about 1.4 percent. Note that an estimate of unity lies within two standard errors. As a numerical example, with a monetary base equal to US$1.6 billion (the average for 1998), a US$16 million reduction (expansion) of central bank domestic assets implies an approximate US$20 million rise (fall) in international reserves (with a fixed exchange rate). Traditional monetary models suggest that international reserves would rise (fall) by US$16 million, and this amount lies within the confidence interval. In subsequent periods, effects of wδ on EMP remain positive, but with t-statistics below 2. Between months 0 and 5, the cumulative response of a 1 percent increase (decrease) to δ is an increase (decrease) in EMP of about 3¾ percent.

151. Shocks to changes in the interest rate differential (wφ) negatively affect EMP (see table 2, part B, and Figure 2, bottom). The hypothesis that lagged Δφ does not help explain current EMP is rejected at slightly higher than the 95 percent confidence level. There is an IRF at month 3 that is negative and significant. That is, according to these results, a 1 percent positive (negative) shock to the change in the interest rate differential causes EMP to fall (rise) by about 1 percent, but after three months.

152. Shocks to EMP (wE) positively affect Δφ (see table 2, part B and Figure 3, top). A positive relationship between wE and Δφ should not be surprising, as higher (lower) EMP generally indicates higher (lower) expected exchange rate depreciation, risk, or both. Reduced (increased) EMP boosts (lowers) investor confidence and reduces (increases) the domestic interest rate (relative to its U.S. counterpart). The hypothesis that EMP does not help explain current Δφ is rejected only at the 80 percent level (as shown in Table 3). However, the response of Δφ to a shock to EMP after two months equals 0.3 and has a t-statistic of about 2.19. That is, a 1 percent reduction (increase) in EMP reduces (increases) the interest rate differential by about 30 basis points after two months.

153. Domestic credit shocks (wδ) appear to have little effect on the change in interest rate differentials (see Table 3 and Figure 3, bottom). Such a finding, need not be surprising, given the theoretically ambiguous nature of the link between these two variables, as mentioned in the previous section. The hypothesis that lagged δ does not help explain current φ is not rejected at conventional levels, and there are no significant responses.

154. Regarding a policy reaction function, there is little evidence that EMP shocks (wE) systematically affect the growth of domestic credit (δ) (see Table 3 and Figure 4, top). The hypothesis that lagged EMP does not help explain current δ is not rejected at conventional levels. Moreover, no IRF has a t-statistic exceeding |2|. This suggests that the authorities have not been forced to respond, on average, to increased EMP with additional liquidity to the banking system.85

155. Likewise, there is little evidence linking shocks to the interest rate differential (wφ) to δ (see Table 2 and Figure 4, bottom). Rather, the hypothesis that lagged Δφ does not help explain current δ is not rejected at conventional levels, and there are no significant responses.

E. Summary and Policy Implications

156. This chapter examined the relationship between exchange market pressure (EMP) and monetary policy during the 1990s. Since the exchange rate regime was neither perfectly fixed nor freely floating, it would be misleading to focus exclusively on either reserve or exchange rate movements. Rather, EMP is more appropriate as it summarizes the difference between the growth rates of money supply and demand under managed exchange rate regimes.

157. This chapter provided evidence on several questions. First, shocks to the domestic credit component of the monetary base have powerful impacts on EMP in the “right” direction: a reduction in δ helps reduce EMP (either by increasing the value of the peso or the stock of international reserves, or both). The response of EMP to interest shocks was somewhat weaker than that linking EMP and domestic credit growth, but also in the “right” direction. These findings, taken together, support the hypothesis that monetary policy is effective in controlling EMP. In a related vein, the chapter provided some insights into the determinants of interest rate differentials, i.e., that shocks to EMP positively affect interest rate differentials. This is to be expected as higher EMP signals both expected exchange rate depreciation and higher risk.

158. This chapter has three main policy implications. First, the stance of monetary policy, as measured by the growth of the net domestic assets of the central bank (δ), has been an important determinant of EMP. On a contemporaneous basis alone, the growth of central bank domestic assets explains about 17 percent of all movements in EMP. Second, monetary policy is effective in helping to build up reserves. According to the estimates, a 1 percent reduction in the net domestic assets of the central bank will increase reserves (reduce EMP) in the same period by about 1.4 percent. In subsequent periods, there should be additional reserve gains. Numerically, with a monetary base equal to US$1.6 billion (the average for 1998), a US$16 million reduction of central bank domestic assets implies an approximate US$20 million increase in international reserves.86 Third, EMP (primarily reserve movements in the case of the Dominican Republic) feed back to the interest rate differential. The estimates suggest that a US$16 million increase in reserves will reduce the spread between domestic and U.S. interest rates by about 30 basis points.

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APPENDIX I Major Fiscal Measures, April 1997-February 1999

Law No. 141-97—Public Enterprise Reform General Law of June 24, 1997.

Allows for participation of the private sector in the management and ownership of the Dominican Electricity Corporation, the State Sugar Council, enterprises held by the Dominican Corporation of State Enterprises, and hotels held by the Corporation for the Promotion of the Hotel Industry. Created the Public Enterprise Reform Committee as the entity responsible for the reform process, with jurisdiction over all entities subject to transformation.

Resolution No. 1 of the Secretary of Labor, July 12, 1997.

Raised the minimum monthly wage of workers in the free-trade zones to RD$1,932.

Law No. 166 of July 27, 1997.

Created the General Department of Domestic Taxes (Directión General de Impuestos Internos) for collection of all domestic taxes.

Resolution No. 2 of the Secretary of Labor of July 31, 1997.

Raised the minimum monthly wages of workers in hotels, bars, restaurants, and similar activities to RD$2,350, RD$1,675, and RD$1,510 for large, medium and small enterprises, respectively.

Resolution No. 3 of the Secretary of Labor of September 29, 1997.

Raised the minimum monthly wages for workers in the industrial sector, commerce, and services to RD$2,412, RD$1,728, and RD$1,555 for large, medium and small enterprises, respectively.

Decree No. 359 of September 28, 1998.

Created the Solidarity Fund for Reconstruction, whose financing would be provided, inter alia, by direct government transfers (RD$100 million), bonds issues (RD$800 million), and by a special tax on public sector employees.

APPENDIX II Major Changes in Financial Sector Policies, April 1997-February 1999

Monetary Board Resolution No. 1 of October 28, 1997.

Authorized the central bank to issue RD$1 billion of participation certificates with an annual interest rate of 14 percent.

Monetary Board Resolution No. 2 of October 28, 1997.

Modified Resolution No. 5 of January 23, 1997, and postponed to March 1, 1998 the date after which the commercial banks can opt for the gradual redemption of participation certificates issued under Resolution No. 9 of January 25, 1996. The annual interest rate paid on these certificates remained unchanged at 8 percent, as established by Resolution No. 3 of April 25, 1996.

Monetary Board Resolution No. 1 of January 20, 1998.

Established a minimum solvency ratio of 10 percent for commercial banks, multiservices banks, and other financial institutions

Monetary Board Resolution No. 2 of January 20, 1998.

Froze commercial and multiservice banks’ excess reserves on January 16 for 90 days in a special account of the central bank to be remunerated at an annual interest rate of 8 percent.

Monetary Board Resolution No. 3 of January 20, 1998.

Limited the commercial bank net credit to the consolidated public sector in 1998, including the central government, to the level outstanding on January 31, 1997. The resolution also applied to the Reserves Bank.

Monetary Board Resolution No. 4 of January 20, 1998.

Modified Resolution No. 1 of October 28, 1997 by raising the interest rate on certificates of participation to 16 percent.

Monetary Board Resolution No. 5 of January 20, 1998.

Established a surrender requirement for foreign exchange agencies. Agencies may not maintain open positions in foreign exchange and are obliged to surrender to the central bank (within 48 hours) their excess purchases of foreign exchange.

Monetary Board Resolution No. 6 of January 20, 1998.

Established a weight of 100 percent for credits in foreign currency in the calulation of the basis for banks’ provisions on loans.

Monetary Board Resolution No. 7 of January 20, 1998.

Established that all financial institutions should finalize by December 31, 1998 their plans to comply with Y2K standards.

Monetary Board Resolution No. 1 of March 5, 1998.

Established that foreign exchange dealers must open special foreign exchange accounts with commercial and multiservice banks for all transactions, except those related to imports.

Monetary Board Resolution No. 2 of March 5, 1998.

Confirmed the Resolution of January 13, 1995, which established a surrender requirement for commercial and multiservice banks.

Monetary Board Resolution No. 1 of July 2, 1998.

Devalued the official exchange rate and reestablished the weekly adjustment mechanism based on the average of the commercial bank buy rates.

Monetary Board Resolution No. 2 of July 2, 1998.

Raised the commission on foreign exchange operations from 1.5 percent to 1.75 percent.

Monetary Board Resolution No. 1 of July 30, 1998.

Excluded interbank deposits from the calculation of the reserve requirement.

Monetary Board Resolution No. 1 of November 25, 1998.

Authorized the central bank to issue up to RD$1 billion of participation certificates with a one-year maturity and interest rate of 16 percent.

Monetary Board Resolution No. 1 of February 12, 1999.

Limited the Reserves Bank’s net credit to the public sector in 1999, including the central government, to the level outstanding on January 31, 1999.

Monetary Resolution No. 2 of February 12, 1999.

Authorized the central bank to postpone by 45 days the early redemption of participation certificates. The resolution was to be reviewed after 30 days

Monetary Resolution No. 3 of February 12, 1999.

Limited credit by commercial and multiservice banks to the commercial sector, excluding in foreign currencies, to the level outstanding on December 31, 1998. The ceiling was imposed for 90 days. Banks with outstanding credits above the ceiling had 30 days to comply. The resolution was to be reviewed after 30 days.

Monetary Resolution No. 4 of February 12, 1999.

Froze 20 percent of the excess reserves held by commercial and multiservice banks on February 11, 1999, for a period of 90 days. The rate of remuneration was set to 8 percent. The resolution was to be reviewed after 45 days.

APPENDIX III Major Changes in the Exchange and Trade System, April 1997–February 1999

Law No. 150 of July 7, 1997.

Set a zero tariff rate for imports of animals, inputs, machinery, and equipment used in agricultural production. Exempted these imports from the value-added tax and exchange rate surcharge.

Decree No. 367-97 of August 29, 1997.

Set a zero tariff rate for several items, including raw materials and industrial equipment used in textile manufacturing.

Decree No. 114-98 of March 16, 1998.

Eliminated all remaining nontariff trade barriers that had been created by earlier presidential or administrative decrees.

APPENDIX IV Dominican Republic: Summary of the Central Government Tax System as of March 31, 1999

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Prices in effect on March 31, 1998. Resolution 128-96 allows for prices to be adjusted periodically for, inter alia, changes in the consumer price index, world oil prices, and the official exchange rate, but in practice, adjustments have been infrequent.

Table 1.

Dominican Republic: Macroeconomic Flows

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

In response to Hurricane Georges, Paris Club creditors informally agreed to tolerate arrears for up to six months on debt service due from September 22, 1998 to December 31, 1999.

Includes quasi-fiscal operations of the central bank.

Includes the overall balance of the nonconsolidated public enterprises.

The denominator is the average of the stock of money and quasi-money (M2) at the beginning and end of the year.

Table 2.

Dominican Republic: GDP by Sector at Current Prices

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Source: Central Bank of the Domiriican Republic.

Only includes wages and salaries.

Table 3.

Dominican Republic: GDP by Sector at Constant Prices

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

Only includes wages and salaries.

Table 4.

Dominican Republic: Gross Domestic Expenditure at Current Prices

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.
Table 5.

Dominican Republic: Gross Domestic Expenditure at Constant Prices

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.
Table 6.

Dominican Republic: Savings and Investment

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

Includes change in inventories.

Table 7.

Dominican Republic: Output of Selected Products

(In thousands of metric tons; unless otherwise specified)

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Source: Central Bank of the Dominican Republic.