Book 12G - Monetary SG

State SG objective

Objective: promote sustained and non-inflationary growth of economy -> maintain a long term stable and comparatively strong currency

Describe SG monetary policy + ER system

1. ER policy 

2. Managed-float exchange rate system

• Singapore dollar is guided higher or lower against a trade-weighted basket of currencies of Singapore’s major trading partners and competitors 

• S$NEER = Singapore Dollar Nominal Effective Exchange Rate (Not SGD against 1 currency) 

  • S$NEER strengthens -> SGD appreciated against that whole basket on average

Describe reasons for SG NO IR policy

1. Small and open economy 

2. Interest rate price-taker

• Small size of SG economy makes Singapore price-taker in the world market for funds -> influenced by larger economics like US 

3. Free movement of capital 

Describe reasons for SG NO IR policy (free movement of capital)

• SG is an international financial centre where financial capital is allowed to flow in and out freely

• SG loses control of her domestic money supply and interest rate

• Eg. MAS raises interest rate → ↑ SG interest rate → Capital inflow from USA into SG → ↑ demand for SGD → Upward pressure on SGD (appreciates) → hits upper band of managed float → MAS intervenes, sells SGD → ↑ domestic money supply → ↓ downward pressure on interest rate → MAS cannot maintain interest rate above major economies

SG during recession caused by fall in external demand

• MAS adopt a policy of either zero appreciation or slight depreciation (NOT gradual appreciation) 

• 0 appreciation: Cap the upper limit of the SGD so that the X will not become uncompetitive and mitigate the fall in external demand