Monetary and Economic Studies Vol.25, No.S-1 / December 2007

Monetary Policy in East Asia : The Case of Singapore

Bennett T. McCallum

The Monetary Authority of Singapore conducts policy by adjusting the Singapore dollar's effective exchange rate so as to achieve macroeconomic goals for the economy's inflation rate and output gap. Estimates of a policy rule of the Taylor type, except with exchange rate appreciation serving as the instrument/indicator variable, substantiate this interpretation. That this rule reflects policy that is much like inflation targeting is evidenced by the absence of any significant role for the real exchange rate as a distinct target variable in addition to inflation and the output gap. Simulations with a dynamic model of a small open economy illustrate that this type of rule can be relatively more advantageous in economies that (like Singapore) are extremely open to international trade. The analysis illustrates that monetary policy and exchange rate policy are two sides of the same coin, which suggests that assignment of exchange rate management to a nation's fiscal authority is an anachronism.

Keywords: Exchange rate; Inflation targeting; Instrument variable; Target variable; Open economy; Monetary policy

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2007 Bank of Japan All Rights Reserved.

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