In support of MAS’ monetary policy function, we continued to deepen our understanding of the structure and dynamics of the Singapore economy through a broad range of policy research analyses.
Over the past year, a number of studies were conducted in the area of Singapore’s monetary transmission mechanism. In a recent study, which was also tabled at the Bank for International Settlements’ Deputy Governors Meeting in Basel, we found inflation expectations in the domestic economy to be fairly well-anchored, with market participants anchoring their long-term expectations of Singapore’s CPI inflation (over ten years) at around 1.5% to 2% on average. This is against the context of fairly flexible relative pricing in the economy. Indeed, in a study in the October 2006 Macroeconomic Review on the price-setting mechanism and pattern of price changes in Singapore, we found that domestic consumer prices have tended to adjust fairly frequently, in line with changing business conditions.
Other in-depth studies on the Singapore macroeconomy over the past year included an assessment of the relationship between the output gap and inflation, and an analysis of the uncovered interest parity (UIP) condition in Singapore. In the latter, the UIP condition was found to hold in Singapore both before, and after, the Asian Financial Crisis. These findings reinforce the open economy trilemma, in which the use of the exchange rate as the intermediate target instrument of monetary policy, implies that domestic interest rate movements are more affected by changes in the foreign interest rate, within an environment of free capital mobility. These were presented in the April 2006 and October 2006 issues of the Macroeconomic Review, respectively. We also conducted an empirical review of the Electronics Leading Index (ELI), a composite index of activity developed in 2003 to predict the performance of Singapore&rsq
uo;s electronics industry. It was found that the ELI’s forecasting ability could be further enhanced by correcting for its month-to-month volatility. MAS will continue to use the ELI as a tool to complement its surveillance work and assessment of Singapore’s economic outlook.
In addition, we continued with our Visiting Scholar programme, as part of our efforts to both broaden and deepen the research capabilities at the MAS. The past year saw several distinguished visitors sharing their expertise with MAS officers, including Andrew Rose (University of California-Berkeley), Graciela Kaminsky (George Washington University), Ibrahim Stevens (Bank of England, Centre for Central Banking Studies), Choy Keen Meng (Nanyang Technological University) and Peter Wilson (National University of Singapore).
Economic education initiatives were also actively pursued, with MAS officers delivering presentations and lectures on monetary policy issues to various junior colleges, and at the Economic Society of Singapore’s Annual Student Seminar.