This paper develops an open economy dynamic stochastic general equilibrium (DSGE) model based on NewKeynesian
micro-foundations. Alongside standard features of emerging economies, such as a combination of
producer and local currency pricing for exporters, foreign capital inflow in terms of foreign direct investment and oil
imports, this model also incorporates informal labor and production sectors. This customization intensifies the
exposure of a developing economy to internal and external shocks in a manner consistent with the stylized facts of
Business Cycle Fluctuations. We then focus on optimal monetary policy analysis by evaluating alternative interest
rate rules and calibrate the model using data from Pakistan economy. The learning and determinacy analysis
suggest monetary authority in developing economies to follow Taylor principle in large and to put some weight on
exchange rate fluctuations even if there is relatively less inertia in the setting of policy interest rate.