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Need Singapore Fear Floating? A DSGE-VAR Approach

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  • Hwee Kwan Chow

    ()
    (School of Economics, Singapore Management University)

  • Paul D. McNelis

    ()
    (SDepartment of Finance, Graduate School of Business Administration, Fordham University)

Abstract

This paper uses a DSGE-VAR model to examine the managed exchange-rate system at work in Singapore and asks if the country has any reason to fear floating the exchange rate with a Taylor rule inflation-targeting mechanism that uses the short term interest rate instead of the exchange rate as the benchmark monetary policy instrument. Our simulation results show that the use of a more flexible exchange rate system will reduce volatility in inflation and investment but consumption volatility will increase. Overall, there are neither signi ficant welfare gains or losses in the regime shift. Given the highly open and trade dependent nature of the Singapore economy where the policy preference is for exchange rate stability, there is no impetus to abandon the present monetary regime.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 29-2010.

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Length: 26 pages
Date of creation: Dec 2010
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:29-2010

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  1. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05.
  2. Sungbae An & Heedon Kang, 2011. "Oil Shocks in a DSGE Model for the Korean Economy," NBER Chapters, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 295-321 National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  4. Michael B. Devereux, 2003. "A Tale of Two Currencies: the Asian Crisis and the Exchange Rate Regimes of Hong Kong and Singapore," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 38-54, February.
  5. Hwee Kwan Chow, 2004. "A VAR Analysis of Singapore’s Monetary Transmission Mechanism," Working Papers 19-2004, Singapore Management University, School of Economics.
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Cited by:
  1. Berganza, Juan Carlos & Broto, Carmen, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," BOFIT Discussion Papers 9/2011, Bank of Finland, Institute for Economies in Transition.
  2. Joseph D. ALBA & Wai–Mun CHIA & Donghyun PARK, 2011. "Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia," Economic Growth centre Working Paper Series 1105, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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