Transcript 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
how to get
an “A” for
the econs
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)
Why do we need
monetary 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
Costs of Inflation
Menu
Shoeleather
Fiscal
Anticipated Inflation
Costs of Inflation
Inflation tax
Misallocation of
resources
Introduces
uncertainty
Unanticipated Inflation
Wage-price
spiral
Inflation is bad; but
what about deflation?
ref: Economics Explorer #3
MAS website:
www.mas.gov.sg
How does monetary policy
work?
Objectives
• Inflation
• Unemployment
• Growth
Instruments
• Exchange rate
• Interest rates
• Money
MAS’ Monetary Policy
Objective
To promote
sustained and
Exchange rate
non-inflationary
growth of
the
Inflation
economy
Why the Exchange Rate?
Openness to Trade
Openness to Capital Flows
Open Economy
Openness
to trade
Imports
Inflation from
exporting
country
Exports
Competitiveness
effects
What about reserve
requirements and
money market
operations?
ref: Economics Explorer
#2,4,5
How Do Exchange Rates Work?
2 Channels
a) Direct
Foreign Price
e
Domestic Price
How Do Exchange Rates Work?
b) Indirect
Domestic
Sale Price
Stronger S$
exchange rate
Le
ss
co
m
pe
titi
ve
F
ex
al
po
l
rts
in
in
w
sh
aor
gteru
sn
&
e
Foreign
Sale Price
Slower
export
growth
& slack
in
econo
my
Inflation
goes
down
Medium Term Orientation
On Price Stability
• Transmission lags
– Can be long and variable
• Cushion shocks?
– Depends on nature of shock
– Double-edged sword
Key Characteristics of the
Exchange Rate System
BASKET
BAND
CRAWL
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
Why not fixed or
floating exchange
rates for Singapore?
ref: “Singapore’s
Exchange Rate Policy”
Monetary Policy in Action
The
external environment
has improved significantly
since the beginning of 2002. … Against this favourable backdrop,
the
Singapore economy
half of this year. … we expect
continued to recover in the first
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 S$NEER for the second half of 2002.
Monetary Policy
Cannot Work Alone
Framework of sound & consistent
macroeconomic policies
Effective
legal
and
judicial
system
Deep &
efficient
financial
markets
Sound
corporate
sector
Prudent
fiscal
policy