Monetary Policy in Singapore

1
Monetary Policy in Singapore

• Understanding the
• Singapore Economy Seminar
• Economic Society of Singapore
• 27 July 2002

Ms Celine Sia, Lead Economist Monetary Policy
Division, Economics Department, MAS
2
Why are we here today?

• 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)

To find out how to get an A for the econs exam?
3
Why do we needmonetary policy?

• Nowadays, primarily used to pursue goal of price
  stability, as there are costs to high inflation
• In some countries other goals include economic
  growth or full employment

4
Costs of Inflation
Fiscal
Anticipated Inflation
5
Costs of Inflation
Inflation tax
Misallocation of resources
Introduces uncertainty
Wage-price spiral
Unanticipated Inflation
6
Inflation is bad but what about
deflation? ref Economics Explorer 3 MAS
website www.mas.gov.sg
7
How does monetary policy work?

• Objectives
• Inflation
• Unemployment
• Growth

• Instruments
• Exchange rate
• Interest rates
• Money

8
MAS Monetary Policy Objective
To promote sustained andnon-inflationary growth
of the economy
Exchange rate
Inflation
9
Why the Exchange Rate?
10
Open Economy
11
What about reserve requirements and money market
operations? ref Economics Explorer 2,4,5
12
How Do Exchange Rates Work?
2 Channels
a) Direct
Domestic Price
Foreign Price
13
How Do Exchange Rates Work?
b) Indirect
e
Domestic Sale Price
Foreign Sale Price
14
Medium Term Orientation On Price Stability

• Transmission lags
• Can be long and variable
• Cushion shocks?
• Depends on nature of shock
• Double-edged sword

15
Key Characteristics of the Exchange Rate System
16
Monetary Policy Framework since 1981

• Exchange rate centred monetary policy
• Managed against a trade-weighted basket of
  currencies
• Trade-weighted S allowed to float within an
  undisclosed target band
• Exchange rate reviewed on a half-yearly cycle to
  ensure it remains consistent with underlying
  economic conditions

17
Why not fixed or floating exchange rates for
Singapore? ref Singapores Exchange Rate
Policy
18
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 a
whole 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 SNEER for the second
half of 2002.
19
Monetary Policy Cannot Work Alone
Framework of sound consistent macroeconomic
policies
Prudent fiscal policy