Abstract
Singapore has an unusual exchange rate-centred monetary policy framework that has served the economy well over the past decades. Monetary policy operations are carried out by the central bank through the management of the Singapore dollar against a currency basket. As is well recognised, such foreign exchange interventions do have an impact on domestic liquidity conditions. However, in the case of Singapore, this tends to be counteracted by the liquidity impact of public sector operations related to the fiscal position and the national pension scheme. The central bank takes into account the net liquidity impact of these and other autonomous money market factors as well as banks’ demand for funds when performing money market operations to regulate the amount of domestic liquidity in the financial system. We conclude with an explanation of the negligible liquidity impact of currency in circulation as reflecting Singapore’s gradual transformation towards a cashless society.
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Notes
- 1.
Obstfeld et al. (2004) summarises the open economy trilemma by saying that monetary policy can only achieve fully two of the following three dimensions: monetary policy independence, fixed exchange rates , and open capital accounts.
- 2.
Chow et al. (2014) showed, through a DSGE-VAR, model that export price shocks were a major source of output volatility in Singapore and, consequently, the exchange rate system at work had a comparative advantage over Taylor rule in terms of reducing inflation volatility. Indeed, CPI inflation in Singapore averaged around 2.3% since 1980, which is relatively lower than in the advanced countries.
- 3.
MacDonald (2004) estimated the equilibrium level of Singapore’s real effective exchange rate and found the Singapore dollar to be close to equilibrium in the early 2000s. Nonetheless, as illustrated in Phillips et al. (2013), estimating the equilibrium exchange rate has become more complex. Apart from traditional fundamental variables, financial factors and policy variables have to be taken into consideration in determining the real exchange rate . The extent to which the central bank will intervene in the foreign exchange market in order to lean against misalignments will thus depend on how certain they are regarding their assessment of currency misalignment.
- 4.
Over the years, Singapore has maintained a conservative fiscal policy as well as a commitment to low inflation and a strong Singapore dollar, which has helped to build the central bank ’s credibility. Hence, market participants appear mostly convinced of the MAS ’ commitment to enforce the policy band, and they tend to keep within it. Such market discipline, in turn, alleviates the need for frequent central bank intervention operations in the foreign exchange markets (Krugman 1991).
- 5.
Due to the unavailability of more current data on the MAS ’ trade weighted index (S$NEER), we use the nominal exchange rate as computed by the IMF which is denoted by NEER. Both the NEER and REER time series are indexes whose values in 2010 are normalised to 100.
- 6.
The overall balance of payments remained positive, except on rare occasions, in spite of the persistent export of capital abroad.
- 7.
Foreign exchange reserves rose from 6.6 billion USD in 1980 to 248 billion USD in 2014 in Singapore. The high level foreign reserves, in turn, serve to deter currency speculators, as it grants the MAS the latitude to carry out intervention operations on a sufficiently large scale to defend the currency .
- 8.
Employee and employer’s CPF contribution rates are currently at 17% and 20% of gross salary for those earning above S$750 per month and below 56 years of age.
- 9.
While the ageing workforce has been partially mitigated by immigration policies, the current political climate poses constraints on the intake of large numbers of foreign workers.
- 10.
Apart from its role as a central bank , the MAS is also responsible for the supervision and development of the Singapore financial services sector.
- 11.
See panel remarks made by MAS Managing Director Ravi Menon on FinTech – Harnessing its Power, Managing its Risks at the Singapore Economic Policy Forum held on 2 April 2016.
- 12.
In a keynote address titled “A Smart Financial Centre” by the MAS managing director, Mr. Ravi Menon, at the Global Technology Law Conference 2015 on 29 Jun 2015.
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Chow, H.K. (2017). Domestic Liquidity Conditions and Monetary Policy in Singapore. In: Rövekamp, F., Bälz, M., Hilpert, H. (eds) Cash in East Asia. Financial and Monetary Policy Studies, vol 44. Springer, Cham. https://doi.org/10.1007/978-3-319-59846-8_5
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