Macroeconomic policy in the Dominican Republic: Progress ... · Source: produced by the author...

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J.R. Sánchez-Fung: Macroeconomic policy in the Dominican Republic…

Macroeconomic policy in the Dominican Republic:

Progress and challenges

José R. Sánchez-Fung University of Nottingham, Ningbo

22 November 2019

Centro Latinoamericano-Suizo

University of St. Gallen

St. Gallen, Switzerland

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ABSTRACT

1. The Dominican Republic’s economy grew at a solid pace during the

1990s and up to the start of the new millennium. However, imbalances

in the economy and policy mistakes contributed to exacerbating the

negative impact of the banking crisis occurring in 2002-2003.

2. Subsequent reforms focusing on monetary policy have so far yielded

positive outcomes, mainly in the shape of a maturing inflation-

targeting framework. However, progress in refining fiscal policy’s

design and implementation is somewhat lagging behind.

3. Looking ahead, consolidating macroeconomic policy demands a firm

commitment to achieving clear economic objectives. For instance, by

promoting rules-based principles in managing fiscal policy.

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PLAN FOR THE PRESENTATION

The Dominican Republic economy’s long-run growth

performance

Reforms and growth in the 1990s, and crisis in the new

millennium

Reforming monetary policy

Fiscal policy: status quo?

Challenges for macroeconomic (fiscal-monetary)

policy

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THE DOMINICAN REPUBLIC ECONOMY’S

LONG-RUN GROWTH PERFORMANCE

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Source: produced by the author using the IMF’s online DataMapper facility

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NOTE outstanding period in graph during last 40 years

REFORMS AND GROWTH DURING THE 1990S

Story on the Dominican Republic’s long-run growth

performance:

S. Pozo, J.R. Sánchez-Fung, and A.U. Santos-Paulino (2011)

Macroeconomics and Finance in Emerging Market Economies

doi.org/10.1080/17520843.2011.548594

Economic growth accounting exercise

Time-series-based econometric modelling analysis using many

explanatory variables

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…STILL

CRISIS AT THE START OF THE 2000s

Economic analysis

J.R. Sánchez-Fung (2019)

Quarterly Journal of Finance and Accounting

business.creighton.edu/qjfa

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Banking supervision failures

Banking rescue effort circa 20% of GDP -complex rescue

Broken transmission mechanism of monetary policy via

interest rates (see graphs below)

So difficult to stabilize expectations

J.R. Sánchez-Fung (2008)

Macroeconomics and Finance in Emerging Market Economies

doi.org/10.1080/17520840701834958

https://doi.org/10.1080/17520840701834958

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Source: Sánchez-Fung (2008)

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REFORMING MONETARY POLICY

Solid pace of reforms (legally grounded, chiefly in the

Monetary and Financial Law) since 2003-2004 by the

Central Bank of the Dominican Republic

NEW monetary policy strategy from 2012

Inflation targeting: hits and misses

Implementing the framework is a firm step forward

In line with trends, best practice, worldwide

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FISCAL POLICY: STATUS QUO?

Fiscal policy making not evolving like monetary policy and

best practice worldwide

Long-term fiscal sustainability: Still not a major concern?

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Even if so, details matter…

Quality of expenditure

Intergenerational factors

Space for fiscal consolidation

Fiscal distortions see P.A. Prazmowski (2014)

Empirical Economics: doi.org/10.1007/s00181-012-0669-y

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LOOKING AHEAD

Challenges for macroeconomic policy fiscal-monetary

Aim for better coordination

Pending problem: fiscal effort following banking crisis

(Law 167-07 to recapitalize the central bank)

Recall the government’s budget constraint

𝐺 − 𝑇⏟ 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑟𝑒𝑠𝑢𝑙𝑡

= ∆B + ∆MB⏟ 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡

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Consolidate the central bank’s monetary policy framework

Communication How policy decisions are made matters

Effectiveness and reputation Hitting the target more

often

Address deflationary bias? (see graph below)

Think about international reserves accumulation policy

Pros and cons

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Source: produced by the author using data from the Central Bank of the Dominican Republic (bancentral.gov.do)

https://www.bancentral.gov.do/

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Fiscal policy rules?

Legal basis: National Development Strategy

For example, announce that the government will commit to

using as reference fiscal policy reaction function

Adjusting debt based on past performance

See, e.g., Bohn (1998) Quarterly Journal of Economics

doi.org/10.1162/003355398555793

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Macroeconomic policy in the Dominican Republic:

Progress and challenges

José R. Sánchez-Fung University of Nottingham, Ningbo

22 November 2019

Centro Latinoamericano-Suizo

University of St. Gallen

St. Gallen, Switzerland

Macroeconomic policy in the Dominican Republic: Progress ... · Source: produced by the author...

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