How the exchange rate-centered monetary policy boosted Singapore's economy

Is there a need to re-strategize?

According to Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, the exchange rate-centred framework has served Singapore very well for over three decades.

He noted that Singapore has had one of the best inflation records in the world despite enjoying one of the fastest rates of economic growth. At the Asian Bureau of Financial and Economics Research (ABFER) Opening Gala Dinner, he stressed the importance of Singapore's exchange rate-centred framework in helping the economy.

Here's an excerpt from his speech:

Singapore is a small and extremely open economy. Total exports and imports of goods are each well in excess of 100% of GDP.

 Imports make up 40% of domestic consumption; the exchange rate is thus a powerful tool to moderate the impact of foreign price changes on domestic inflation.

 Exports are the chief driver of economic growth; and the exchange rate, as a key factor affecting export demand, is thus also an effective means for managing aggregate demand and hence overall inflationary pressures. The monetary policy framework centred on the exchange rate remains valid. But has its calibration been sufficiently responsive to recent challenges to price stability?

The chief consideration underpinning the stance of monetary policy in recent years has been to anchor inflation expectations and contain the risk of a wage-price spiral arising from the short-term effects of economic restructuring.

Since April 2010, the policy band of the Singapore Dollar nominal effective exchange rate has been on a modest and gradual appreciation path. The nominal effective exchange rate has strengthened by about 3% per annum on average during this period.

Within this overall tightening stance, MAS has allowed a temporary increase in core inflation to accommodate some of the changes in relative prices. This is to signal resource scarcity and stimulate behavioural shifts. Policy should not be so tight as to hinder the ability of firms to restructure.