Singapore's Unique Monetary Policy: How Does it Work?

January 1, 2004

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Format: Chicago

Eric Parrado. Singapore's Unique Monetary Policy: How Does it Work?, (USA: International Monetary Fund, 2004) accessed December 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The Monetary Authority of Singapore, instead of relying on short-term interest rates or monetary aggregates as its monetary policy instrument, conducts policy by managing the trade-weighted exchange rate index (TWI). This paper investigates how this operating procedure actually works. For empirical purposes, it assumes the authorities follow a reaction function that aims the TWI at stabilizing expected inflation and maintaining output at potential. A partial adjustment mechanism is included to dampen the actual changes in the exchange rate. The estimates confirm that the major focus of monetary policy in Singapore is controlling inflation. The estimated changes in the TWI track the actual change relatively well, and the estimated parameters are as expected. Accordingly, they support the hypothesis that monetary policy in Singapore can be described by a forward-looking policy rule that reacts to both inflation and output volatility. The results suggest that Singapore's monetary policy has mainly reacted to large deviations in the target variables, which is consistent with monetary policy's medium-term orientation.

Subject: Currency markets, Economic forecasting, Exchange rate adjustments, Exchange rate indexes, Exchange rates, Foreign exchange, Inflation, Prices

Keywords: CPI inflation, Exchange rate, Exchange rate adjustments, Exchange rate indexes, Exchange rates, Forecasting inflation, Global, Inflation, Inflation expectation, Inflation pressure, Inflation volatility, Monetary policy innovation, Monetary policy rules, Monetary policy stance, Singapore, Singapore inflation data well, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/010
Stock No:

WPIEA0102004
ISBN:

9781451842722
ISSN:

1018-5941

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