Economic Developments and Monetary Policy

AT THE FRONTIER OF MONETARY POLICY RESEARCH AND ANALYSIS

BOX 13
THE LONG-RUN REAL EFFECTIVE EXCHANGE RATE OF SINGAPORE

Given that currencies can take long “swings” away from their fundamental or fair value, EPD embarked on a study to determine the equilibrium exchange rate and to examine if there was any significant misalignment from this value.

In estimating the equilibrium exchange rate for Singapore, the behavioural equilibrium exchange rate (BEER)-based approach was adopted. This approach has become increasingly popular due to its tractability and transparency. In the study, the long-term movements of the real exchange rate against the evolving fundamentals of the Singapore economy was examined, and found to have a strong relationship with the terms of trade, property prices, net foreign assets and openness. The study also found that the exchange rate was currently close to equilibrium value, although there have been several episodes of misalignment since 1983. This study was published in staff paper number 36: The Long-Run Real Effective Exchange Rate of Singapore: A Behavioural Approach.