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 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)

3. 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

4. Costs of Inflation Anticipated Inflation Shoe- leather Menu Fiscal

5. Costs of Inflation Unanticipated Inflation Misallocation of resources Introduces uncertainty Inflation tax Wage-price spiral

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. To promote sustained and non-inflationary growth of the economy MAS’ Monetary Policy Objective Exchange rate Inflation

9. Why the Exchange Rate? Openness to Trade Openness to Capital Flows

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

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

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

13. b) Indirect Domestic Sale Price Foreign Sale Price e How Do Exchange Rates Work? Stronger S$ exchange rate Le ss co m pe titi ve ex po rts in sh or t- ru n Slower export growth & slack in econo my Inflation goes down F al l in w a g e s & re nt al s

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 BAND CRAWL BASKET

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

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