| Box
16 |
| EXCHANGE
RATE AND MACROECONOMIC VOLATILITY |
| |
Do exchange
rate fluctuations affect the volatility of macroeconomic
variables, such as output, money supply, export volumes
and interest rates?
Past studies have shown that this is not so. MAS published
a paper entitled “Investigating the Relationship
between Exchange Rate Volatility and
Macroeconomic Volatility in Singapore1”
which examines the characteristics of the volatility of
the Singapore Dollar Nominal Effective Exchange Rate (S$
NEER) and investigates how this affects the real economy.
Our study found little evidence of a relationship between
exchange rate volatility and the volatility displayed
by a number of key macroeconomic variables. In addition,
we specifically assessed the effects of exchange rate
volatility on bilateral trade flows in Singapore using
a standard “gravity” model as well as a multivariate
error correction model and found the impact to be relatively
small.
The study concluded that deep and efficient financial
markets can provide an effective buffer against shocks
in the external environment. In Singapore’s context,
it was also found that the flexibility accorded by the
presence of bands in MAS’ managed exchange rate float
system, may have helped to prevent a spill-over of volatility
into the real economy. |
|
