The Monetary Authority of Singapore (MAS) is Singapore’s central bank and conducts monetary policy to maintain price stability conducive to economic growth. The MAS uses its nominal exchange rate (S$NEER) as its intermediate target of monetary policy, unlike most central banks who use the interest rate in its framework to conduct monetary policy. This is mainly due to the country’s open economy nature. The S$NEER fluctuates within a policy band that is calibrated to ensure medium-term price stability. The Monetary Authority of Singapore (MAS) undertakes foreign exchange intervention operations to ensure that the S$NEER stays within the policy band. Central banks around the world, such as the FED use the Taylor rule to guide themselves how interest rates (i.e. a tool of monetary policy) should be altered due to changes in the economy. The model takes into account changes in inflation and output as factors which influence the interest rates adjustment. However, in the case of Singapore, the nominal exchange rate is used instead of interest rates as a monetary policy tool by the MAS. Thus, this presentation aims to look at whether substituting exchange rate in place of interest rate in the Taylor model could describe the conduct of monetary policy by the MAS. Ultimately, these results attempt to contribute to a simplified understanding of Singapore’s unique monetary policy. Greater clarity on the impact of economic fundamentals (inflation and output) on the policy stance would result in a clearer policy framework that would enrich public understanding of how the MAS’s policy works.
Presentation deriving from economics seminar on the theory and practice of central banking with Roisin O’Sullivan, professor of economics.