Monetary Policy in Singapore and the Global Financial Crisis

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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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