Monetary Policy in Singapore and the Global Financial Crisis

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b1110

Challenges for the Singapore Economy

Accounting Standards Board, which are due to be implemented by the

end of 2012. Singapore has formed the Corporate Governance

Council to update its standards on compensation and corporate gover-

nance for companies listed in the Republic. More regulatory changes

are expected.

From a monetary policy perspective, the failure of the traditional

reliance on interest rates and money aggregates operating through the

financial intermediation of banks was of less relevance to Singapore

given its exchange-rate centred monetary policy, but it does emphasise

again the limitations of this policy in dealing with a severe downturn

in the absence of a strong fiscal stimulus and, if necessary, other

unorthodox cost-cutting measures. It also raises an interesting ques-

tion: if necessary would MAS resort to extensive quantitative easing

along the lines of the US and UK if the domestic financial system were

on the brink of collapse?

Surprisingly, there are no obvious institutional or psychological

constraints to this happening. The MAS is not an independent central

bank and there is no historical evidence to suggest that it would be

unwilling to cooperate with the Finance Ministry to provide targeted

direct lending to the private sector if necessary. Neither is there any

reason to believe that it would rule out the ‘nuclear option’ of ‘print-

ing money’. Singapore does not run a currency board system in the

same manner as Hong Kong but it does have a Currency Board

located within the MAS which, under the Currency Act, must main-

tain sufficient foreign assets in its Currency Fund to provide 100%

backing for any currency notes it issues to the banks.

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However, since the Currency Board holds foreign currency

reserves well in excess of the amount of currency in circulation, this

should not be a binding constraint. Anyway the law could always be

changed. Of course, quantitative easing would not be its first choice,

given the inflationary risks, but it need not be ruled out. The more

subtle problem would be whether the subsequent increase in liquidity

Monetary Policy in Singapore and the Global Financial Crisis

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For the differences between the currency boards in Singapore and Hong Kong, see

Peebles and Wilson (2002).

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