Tonga’s monetary authority, National Reserve Bank of Tonga (NRBT) is entrusted with the responsibility of managing Tonga’s monetary system and exchange rate stability. This paper undertakes an empirical study of monetary policies pursued by NRBT with specific focus on the transmission mechanism of monetary policy in Tonga. As the annual data time series cover only a short-period (1981-2008), we resort to bounds testing approach. The study findings show that monetary aggregate in Tonga is more important than short term interest rate as a channel in transmitting impulses from the monetary sector to the real sector
