Academic journal article Journal of Economic Cooperation & Development

Singapore' Exchange Rate Regime: A Garch Approach

Academic journal article Journal of Economic Cooperation & Development

Singapore' Exchange Rate Regime: A Garch Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Monetary policy in Singapore has been characterized, since 1980, by price stability as a basis for sustainable economic growth. In this situation, therefore, thus falls the exchange rate regime that it present tree main features: a) the Singapore dollar is managed against a basket of currencies of major trading partners (in bases to weights) and depending on the extent of dependence with a particular country. So, the composition of the basket is revised every so often to take into account changes in Singapore's trade patterns; b) Monetary Authority of Singapore operates in a managed float regime for the his currency. The trade-weighted exchange rate is permissible to fluctuate within an hidden policy band, to a certain extent than kept to a fixed value. The band provides flexibility for the system to put up short-term fluctuations in the foreign exchange markets as well as some buffer in view of the country's equilibrium exchange rate, which cannot be known exactly. For this reason, Monetary Authority of Singapore' intervention operations generally works with anti-cyclical policies. Now, if the exchange rate moves outside the band, Monetary Authority will usually step in, through a buying or selling foreign exchange so as to guide the exchange rate back within the band; c) the exchange rate policy band is periodically reviewed to ensure that it remains consistent with the basic fundamentals of the macro-economic policy.

The decision to adopt an exchange rate regime type managed float is in accordance with many emerging markets (Calvo and Reinhart, 2002). This is due to eventually find mainly because these countries, such as Singapore, especially in the 70s and 80s, had a low international credibility. In addition, if we recall trilemma, a monetary policy open can only achieve two of the following three objectives: perfect capital mobility, fixed exchange rate regime and monetary policy autonomy. So, as Singapore is a world financial center, it has preferred the mobility of capital or to the detriment of the system of fixed exchange rates or the autonomy of monetary policy. In particular, the Monetary Authority of Singapore chose to use the exchange rate contrasting to the more conservative benchmark policy interest rate as its policy operating tool. But, managing the exchange rate has a high cost associated with the possible epileptic speculative. In this context, with the exception of the Asian financial crisis (1997), the Monetary Authority has successfully deterred speculators to attack the currency over the last three decades even though the major economists argue that it was a managed flexibility of the exchange rate system and its management have helped to Singapore during the Asian crisis. Yip (2005) underlined that Singapore's taking of market driven depreciations in the wake of and amid the deepening of the Asian financial crisis deterred currency speculators from engineering over-depreciation in the domestic currency. Therefore, the Asian financial crisis raised consciousness that exchange rates type peg and its attendant indemnity effect exacerbated boom-bust cycles linked with capital flows, thus contributing to the crisis.

In circumstance, the analysis of Singapore' the exchange rate regime seems very particular. The strength of the Singapore model is, in reality, very flexibility. In fact, a fixed exchange rate regime would imply that over a long run, the inflation rate of the economy in question has to converge to that prevailing in the economies that it trades with. In the adjustment process, since the exchange rate cannot be changed, the entire burden of adjustment must then fall on the goods and the labor markets. While Singapore has more flexibility than most other countries, therefore, a fixed exchange rate regime is not a good idea especially when there are large shocks emanating from the rest of the world. In addition, instead, fully flexible exchange rates on the other hand will introduce volatility into the system, especially in a developing economy. …

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