ECONOMIC DEVELOPMENTS
AND MONETARY POLICY
     
Content Page
 
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US: Vibrant Pace . Europe: Mixed
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Box 15 – Debunking the Deflation Myth in Singapore . International Financial Markets: Broad Recovery Amid Uncertainty
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Box 16 – Exchange Rate and Macroeconomic Volatility . Monetary Policy in an Increasingly Volatile Environment
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Recent Policy Research and Analysis Against the Backdrop of More Frequent Shocks . Box 17 – Creating an Electronics Leading Index
 
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.
 
1 MAS Staff Paper No. 25 Investigating The Relationship between Exchange Rate Volatility and Macroeconomic Volatility in Singapore.