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Monetary Policy in Singapore

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. Why are we here today?. To find out more about monetary policy:

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Monetary Policy in Singapore

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  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. Shoe- leather Menu 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. Openness to Trade Openness to Capital Flows Why the Exchange Rate?

  10. Openness to trade Imports Inflation from exporting country Exports Competitiveness effects Open Economy

  11. What about reserve requirements and money market operations? ref: Economics Explorer #2,4,5

  12. e How Do Exchange Rates Work? 2 Channels a) Direct Domestic Price Foreign Price

  13. Stronger S$ exchange rate Less competitive exports in short-run Slower export growth & slack in economy Inflation goes down Fall in wages & rentals 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. BASKET BAND CRAWL 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: “Singapore’s 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 azero per cent appreciationin the S$NEER for the second half of 2002.

  19. Effective legal and judicial system Prudent fiscal policy Deep & efficient financial markets Sound corporate sector Monetary Policy Cannot Work Alone Framework of sound & consistent macroeconomic policies Prudent fiscal policy

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