Staff Papers
Published Date: 01 June 2003

Investigating The Relationship between Exchange Rate Volatility and Macroeconomic Volatility In Singapore. 

MAS Staff Paper No. 25, June 2003 - By Saktiandi Supaat, Angela Phang, Ng Heng Tiong and Edward Robinson.

Please note that with effect from Jun 2003, the MAS Occasional Paper Series has been replaced by the MAS Staff Paper Series.


This paper examines the characteristics of the Singapore dollar nominal effective exchange rate (SGD NEER) since 1980s and investigates whether the short-term movements in the currency has affected the behaviour of key real macroeconomic variables in the economy. Our analysis of time series properties of the SGD NEER, which utilises a GARCH framework, picked up an increase in the volatility of the domestic currency particularly after the Asian Crisis. The paper then examines the relationship between exchange rate volatility and the volatility of real macroeconomic variables. We adopted a flexible-price monetary model following Flood and Rose (1995) to assess the impact of the increase in exchange rate volatility on real macroeconomic variables in Singapore. Our analysis found little evidence of a relationship between exchange rate volatility and that of a number of key macroeconomic variables. In addition, the paper also specifically assesses 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 results of the analysis provide some support to the argument that volatility in the foreign exchange market may not be transferred to other parts of the economy.