b1110
Challenges for the Singapore Economy
The behaviour of reserve money and broad money is also compli-
cated by net capital inflows from abroad, which increase the
monetary base and tend to appreciate the currency, and the actions of
the MAS to sterilize the liquidity effects of its own foreign exchange
operations on the money market. In 2009, for example, capital
inflows picked up significantly and if MAS intervenes in the forex
market to dampen excessive volatility by selling the Singapore dollar
in exchange for US dollars, this will also increase the monetary base
and may require offsetting sterilization through money market opera-
tions. This explains why a capital inflow need not automatically lead
to a corresponding rise in the monetary base and M2 in Figure 6.
Taking all these factors into consideration, the increase in reserve
money (Figure 6) was modest.
In sum, the MAS responded to the crisis by loosening the
monetary policy stance by flattening the exchange rate policy band
and then re-centring it downwards. From the middle of 2008 over-
all domestic liquidity, as measured by the DLI, trended downwards
as interest rates in Singapore fell in line with a fall in global rates to
low levels as economic activity slackened and central banks eased
monetary policy. At the same time, broad money in Singapore fell
as bank intermediation of reserve money contracted and banks
increased their demand for reserve and settlements balances and
the fall in GDP reduced the number of transactions. To counter
overall contractionary forces operating in the local money market
net of its own foreign exchange operations, MAS carried out
money market operations to ensure sufficient liquidity in the
banking system.
However, monetary policy in Singapore does not work alone.
Indeed fiscal policy has played a larger countercyclical role during this
crisis than in the past and was probably quantitatively more important
than monetary policy. In fiscal year 2009, the government recorded a
primary deficit
86
of about S$4 billion following surpluses of S$3 billion
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C. H. Kwan and P. Wilson
86
This is defined as operating revenue excluding net investment income or returns
less the sum of operating and development spending. The investment income or
returns are excluded on the grounds that they are volatile.
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