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

because mopping up after the event can be very costly and may give

rise to ‘moral hazard’ and further bubbles if investors believe that the

central bank is providing insurance against downside risks. This may

then encourage them to take on excessive risks during the upswing,

thereby exacerbating the bubble. On the other hand, tightening mon-

etary policy during an upturn would reduce the financial institutions’

exposure to bad debts and lessen the severity of subsequent real and

financial disruptions. Furthermore, credible statements by the central

bank that it is concerned and would be willing to act could move pri-

vate sector behavior in a more stabilizing direction (White, 2009).

While this is unlikely to get rid of the bubble entirely, its size would

arguably be smaller and the damaging effects less pronounced.

Secondly, asset inflation may threaten general price stability by

over-stimulating consumption and investment spending or raising

inflationary expectations. For example, swings in house prices can

have potent effects on the economy 

via

their impact on household

wealth, as the recent collapse in the US housing market has shown,

while a stock price boom could be costly to the extent that it encour-

ages excessive business investment in sub-optimal projects. Moreover,

if proactive monetary tightening is viewed as an insurance against the

risk of economic damage brought on by an eventual crash, then the

uncertainty of the boom would still justify preemptive action, just as a

homeowner needs to take some fire insurance even though he is

uncertain that his house will burn down (Borio and White, 2003).

The case for pro-active policy of some kind is also strengthened if

bubbles are seen not as one-off events but rather as a permanent

feature of the economic environment. As Singapore’s Finance

Minister, Tharman Shanmugaratnam puts it:

“Bubbles occur frequently-more so than can be explained if the ‘efficient-

market hypothesis’ holds. They are prolonged, and can cause considerable

economic damage when they burst. Bubbles and the miss-pricing of risk are

not exceptional events, but part of the regular functioning of the financial

markets.”

91

160

C. H. Kwan and P. Wilson

91

See Shanmugaratnam (2009a).

b1110_Chapter-08.qxd  2/21/2011  11:03 AM  Page 160