8/2/2019 Celine_1

1/19

Monetary Policy in

SingaporeUnderstanding theSingapore Economy Seminar

Economic Society of Singapore27 July 2002

Ms Celine Sia, Lead Economist

Monetary Policy Division, Economics Department, MAS

8/2/2019 Celine_1

2/19

Why are we here today?

To find outhow to get an

A for theecons exam?

To find out more about

monetary policy: Why do we need it (inflation,

growth)

How does it work (in

Singapore)

Monetary policy in action(Monetary Policy Statement)

8/2/2019 Celine_1

3/19

Why do we need

monetary policy?

Nowadays, primarily used to pursue

goal ofprice stability, as there are costs

to high inflation

In some countries other goals include

economic growth or full employment

8/2/2019 Celine_1

4/19

Costs of Inflation

Anticipated Inflation

Shoe-leather

MenuFiscal

8/2/2019 Celine_1

5/19

Costs of Inflation

Unanticipated Inflation

Misallocation of

resources

Introduces

uncertainty

Inflation tax

W

age-price spiral

8/2/2019 Celine_1

6/19

Inflation is bad; but what

about deflation?

ref: Economics Explorer #3

MAS website: www.mas.gov.sg

8/2/2019 Celine_1

7/19

How does monetary policy work?

Objectives Inflation

Unemployment Growth

Instruments Exchange rate Interest rates Money

8/2/2019 Celine_1

8/19

To promote sustained andTo promote sustained and

nonnon--inflationary growth ofinflationary growth ofthe economythe economy

MAS Monetary Policy Objective

Exchange rate

Inflation

8/2/2019 Celine_1

9/19

Why the Exchange Rate?

Openness to Trade

Openness to Capital Flows

8/2/2019 Celine_1

10/19

ImportsInflation fromexporting country

ExportsCompetitivenesseffects

Openness totrade

Open Economy

8/2/2019 Celine_1

11/19

What about reserve

requirements and

money market

operations?

ref: Economics Explorer #2,4,5

8/2/2019 Celine_1

12/19

Foreign Price Domestic Price

e

How Do Exchange RatesWork?

a) Direct

2 Channels

8/2/2019 Celine_1

13/19

b) IndirectDomesticSale Price

ForeignSale Price

e

How Do Exchange RatesWork?

Stronger S$exchange rate

Lesscomp

etitiveexports

inshort-

run

Slowerexport

growth &slack ineconom

y

Inflationgoes down

Fallinwages&

re

8/2/2019 Celine_1

14/19

Medium Term Orientation On Price

Stability

Transmission lags

Can be long and variable

Cushion shocks?

Depends on nature of shockDouble-edged sword

8/2/2019 Celine_1

15/19

Key Characteristics of the Exchange

Rate System

BAND

CRAWL

BASKET

8/2/2019 Celine_1

16/19

Monetary Policy Framework since

1981Exchange rate centred monetary policy

Managed against a trade-weighted basket ofcurrencies

Trade-weighted S$ allowed to float within anundisclosed target band

Exchange rate reviewed on a half-yearly cycle toensure it remains consistent with underlying

economic conditions

8/2/2019 Celine_1

17/19

Why not fixed or floating

exchange rates for

Singapore?

ref: Singapores Exchange RatePolicy

8/2/2019 Celine_1

18/19

Monetary Policy in Action

The external environment has improved significantly since the

beginning of 2002. Against this favourable backdrop, the Singapore

economy continued to recover in the first half of this year. we expect

CPI inflation for 2002 as awhole to come in near the mid-point of our forecast range of -0.5% to 0.5%.

real GDP growth could come in at the upper half of the official forecast

range of 2-4% in 2002. MAS will maintain its current policy stance of a zero

per cent appreciation in the S$NEER for the second half of 2002.

8/2/2019 Celine_1

19/19

Monetary Policy

CannotW

ork AloneFramework of sound & consistentFramework of sound & consistent

macroeconomic policiesmacroeconomic policies

Prudent

fiscalpolicy

Effective

legaland

judicialsystem

Deep &

efficientfinancialmarkets

Sound

corporatesector

Prudent

fiscalpolicy