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Monetary Policy in East Asia: the Case of Singapore

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  • Bennett T. McCallum

    (Carnegie Mellon University and National Bureau of Economic Research (E-mail: bmccallum@cmu.edu))

Abstract

The Monetary Authority of Singapore (MAS) conducts policy by adjusting the Singapore dollarfs effective exchange rate so as to achieve macroeconomic goals for the economyfs inflation rate and output gap. Estimates of a policy rule of the Taylor type, except with exchange rate appreciation serving as the instrument/indicator variable, substantiate this interpretation. That this rule reflects policy that is much like inflation targeting is evidenced by the absence of any significant role for the real exchange rate as a distinct target variable in addition to inflation and the output gap. Simulations with a dynamic model of a small open economy illustrate that this type of rule can be relatively more advantageous in economies that (like Singapore) are extremely open to international trade. The analysis illustrates that monetary policy and exchange-rate policy are two sides of the same coin, which suggests that assignment of exchange-rate management to a nationfs fiscal authority is an anachronism.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 07-E-010.

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Date of creation: Aug 2007
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Handle: RePEc:ime:imedps:07-e-10

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Keywords: exchange rate; inflation targeting; instrument variable; target variable; open economy; monetary policy;

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  1. Bennett T. McCallum, 2006. "A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 9-42 National Bureau of Economic Research, Inc.
  2. Robert N McCauley, 2002. "Setting Monetary Policy in East Asia: Goals, Developments and Institutions," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ33, June.
  3. Ramkishen S. Rajan & Reza Siregar, 2002. "Choice of Exchange Rate Regime: Currency Board (Hong Kong) or Monitoring Band (Singapore)?," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 538-556, December.
  4. Eric Parrado, 2004. "Singapore's Unique Monetary Policy," IMF Working Papers 04/10, International Monetary Fund.
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Cited by:
  1. Teo, Wing Leong, 2009. "Can exchange rate rules be better than interest rate rules?," Japan and the World Economy, Elsevier, vol. 21(3), pages 301-311, August.
  2. Kazumasa Iwata, 2007. "Housing and monetary policy in Japan," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 445-461.

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