Staff Papers
Published Date: 01 April 2006

Singapore's Exchange Rate-Centered Monetary Policy Regime and Its Relevance for China.

MAS Staff Paper No. 43, April 2006 - By Bennett T McCallum


Although the policy regime of the Monetary Authority of Singapore is centered on exchange rate management, it is fundamentally different from a traditional fixed exchange rate arrangement.  Instead, the exchange rate (a trade-weighted index) is important primarily in its role as an intermediate information or "instrument" variable in a procedure used to achieve the primary objective of low inflation, with some consideration also given to employment.  Thus the exchange rate plays a role much like that of an overnight interest rate in the United States or Japan, among other countries.  Here a calibrated structural model of a small open economy is used to illustrate this process and to demonstrate the attractiveness of an exchange-rate policy rule, relative to an interest-rate rule (designed in each case to achieve macroeconomic objectives) in economies with high ratios of foreign trade to GDP.  These characteristics and results form the basis of an argument that the new exchange rate regime adopted by China in July 2005 is unlikely to resemble the Singapore system.