Monetary Policy in Singapore and the Global Financial Crisis

Do Not Distribute Without Permission

Copyright © 2020 IG Publishing Pte Ltd. All Rights Reserved

Do Not Distribute Without Permission

---

b1110

Challenges for the Singapore Economy

There is, however, a widespread view prevalent among central

bankers themselves, that monetary policy specifically should not

react to anticipated bubbles. A key argument is that bubbles are, by

definition, extremely difficult to identity and there is a lack of pre-

cise criteria for determining if the change in asset prices is consistent

with the change in economic fundamentals.

92

How then should the

central bank react to a bubble when there is uncertainty about its

size and indeed whether it even exists at all? Is it a ‘monster’ bubble

in the making or merely an ‘echo’ bubble?

A good example of this was at the beginning of 2010 when there

were different views as to whether there were bubbles building up in

the Beijing, Shanghai and Hong Kong property markets or whether it

was the result of genuine demand. In China’s case this was com-

pounded by the fact that there was little evidence of bubbles

elsewhere in the economy.

93

This argument is strengthened if there were to be collateral

damage from preemptive tightening on other parts of the economy.

In other words, there is no ‘safe popping’ of asset price bubbles

since monetary policy is a blunt instrument. Given expectations of

further increases in asset prices, the tightening required to quash

any market euphoria may have to be severe and hence, might throw

the economy into recession. According to this point of view policy

makers should be ‘clean’ rather than ‘lean’, that is, the central bank

should wait for the bubble to collapse and then adopt traditional

monetary easing to deal with the aftermath instead of preemptive

Monetary Policy in Singapore and the Global Financial Crisis

161

92

See the opposing views about China’s property bubble in the Singapore Business

Times of June 17, 2010.

93

Since then (May 2010) clearer evidence has emerged that property bubbles are

indeed building up in both China and Hong Kong and the authorities have

responded accordingly. In Beijing families are now limited to buying one new apart-

ment and cannot receive a loan if they have not paid their taxes or social security

contributions and the government is reclaiming land hoarded by developers. In

Hong Kong stamp duty has been increased for luxury flats, corporate purchases are

now restricted to 10% of total sales and the supply of land has been increased. In

August 2010, the rules were tightened further.

b1110_Chapter-08.qxd  2/21/2011  11:03 AM  Page 161