Singapore's Unique Monetary Policy: How Does it Work?
IMF Working Papers, January 1, 2004
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Bibliographic details
- Authors: Eric Parrado
- Published: January 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842722.001
Summary of approach
- The Monetary Authority of Singapore conducts policy by managing the trade-weighted exchange rate index (TWI) instead of relying on short-term interest rates or monetary aggregates.
- For empirical purposes, the paper 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 results suggest monetary policy in Singapore has mainly reacted to large deviations in the target variables, consistent with monetary policy's medium-term orientation.
Key findings and results
- 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.
- The estimated parameters are as expected and 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.
- Monetary policy behavior is characterized by reaction to both inflation and output volatility, with a medium-term orientation that emphasizes responses to large deviations in target variables.
Methodology (empirical framework)
- Assumed policy reaction function: TWI aimed at stabilizing expected inflation and maintaining output at potential.
- Partial adjustment mechanism: Introduced to dampen the actual changes in the exchange rate.
- Focus on forward-looking policy rule that incorporates expectations and volatility in inflation and output.
Subject areas and keywords
- 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
Content in this bundle
- New Phillips Curve for Singapore