Monetary Policy in Singapore and the Global Financial Crisis

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b1110

Challenges for the Singapore Economy

stability as the ultimate target of monetary policy over the medium

term. See, for example, the policy simulations carried out in

Abeysinghe and Choy (2007).

A second factor determining the choice of monetary policy in

Singapore is Singapore’s openness to international capital flows.

Foreign exchange controls and restrictions on inflows and outflows

of capital were resmoved in 1978 and Singapore has always

adopted an ‘open-arms’ approach to foreign investment.

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There is

also a very close relationship between the domestic banking system

and the substantially larger offshore Asian Dollar Market or

ADM.

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There is, in essence, almost perfect capital mobility and

substitutability between domestic (onshore) and foreign (offshore)

financial assets. The consequence of this is that interest rates in

Singapore are essentially determined by world money markets.

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Singapore is, in the financial sense, too small to set its own interest

rates in any effective way and the MAS does not seriously attempt

to manage interest rates or money aggregates. What it does do,

however, is carry out money market operations on a daily basis to

ensure that there is sufficient liquidity in the local banking system to

satisfy the banks’ demand for cash balances to meet their intra-day

settlements amongst themselves and with the central bank and to

neutralize the effects on the domestic money supply of its own

Monetary Policy in Singapore and the Global Financial Crisis

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Although there have been some restrictions in place since 1981 to limit the

offshore use of the Singapore dollar to prevent speculation.

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The ADM is a market where the banks in Singapore which are licensed to deal in

the ADM can lend and borrow in a foreign (offshore) currency, usually the US

dollar. Even if the transaction is in another currency

,

such as the yen, it is still referred

to by convention as the Asian Dollar Market.

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This is reinforced by the well-known ‘policy trilemma’ which suggests that central

banks will have to sacrifice traditional monetary autonomy in terms of targeting

domestic interest rates or money aggregates if they wish to ‘manage’ the currency

and keep the capital market open. Because managing the currency is thought to be

more effective in Singapore in achieving low and stable inflation than traditional

monetary instruments the MAS gives up the latter in favour of an exchange rate

centred monetary policy.

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