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Monetary Policy Assignment Sample

   

Added on  2021-06-17

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Monetary Policy 1MacroeconomicsStudents NameCourseProfessorUniversityDate

Monetary Policy 2MONETARY POLICY IN SINGAPOREPrimarily, the Singaporean Monetary policy has majorly focused on managing itsexchange rates since the year 1980.The Monetary policy’s objective is to boost its medium termprice stability of prices as vital basis for increasing and boosting sustainable and economicdevelopment of the country’s economy due to the fact that Singapore is small and open in nature(Maas 2017).In addition, this monetary policy is aims to regulate the inflation levels in thecountry (Kondo 2018). Despite being a small economy, Singapore prides itself in using theinterest rate and control of currency supply as a paramount tool for its monetary policyimplementation. This unique monetary policy approach has been incorporated since the year1981.Under this policy, the Singaporean dollar is measured against other currencies used by itsmajor trading factors. This initiative has managed to control the inflationary pressures(Gaspar &Issing 2002).It is the mandate of the Monetary Authority of Singapore to regulate the slope of theSingapore currency, Nominal Effective Exchange Rates(S$NEER) policy band.Over the years, the exchange rate policy has grown the economy and kept inflationarypressures in check. The authority has implemented a neutral policy and still facesimplementation setbacks. The policy slope band has been adjusted to accommodate theeconomic changes.Moreover, the monetary authority can increase or reduce the rates as it deemsfit. Since April this year, the Monetary Authority of Singapore increased the slope of theS$NEER policy band in a bid to encourage currency appreciation on an unchanged width andlevel band. According to the MAS statement made On October 2016,the S$NEER policy bandhas been reduced to 0 percent, which has been constant for about 2 years.Noteworthy,2012 wasthe year the slope policy band was last increased. Following the increase in the slope policyband, the Singaporean currency will be stronger due to the recent wrangles between China and

Monetary Policy 3the United States of America while other Asian nations such as Malaysia have increased theirmonetary policies.Majorly, the Singaporean monetary policy has focused on its exchange rate managementsince the year 1981(MAS 2001).Owing to the fact that the Singaporean economy is uniquelysmall and highly dependent on the external economies, the implementation of the exchange ratebased approach seems ideally intermediate and operational objective for the Monetary Authorityof Singapore (MAS 2013). Direct intervention into the foreign exchange market has broughtabout control which makes it easy to achieve stability of prices and sustainable economicdevelopment (Tee, n .d).Notably, the exchange rate framework in Singapore possesses keyfeatures (MAS 2001).Firstly, the Singapore currency is weighed against a basket of currencies ofits majority business competitors and partner’s .The currency is arranged according to theirbusiness importance between the global countries and Singapore. The basket against which the Singapore currency is measured accommodates the changesincurred under the trading model account (MAS, 2001).Secondly, the Monetary Authority hasimplemented a managed floating system for the Singaporean currency .Essentially, tradeweighted exchange rates are capable of accommodating fluctuations within undisclosed policiesinstead of maintaining fixed levels of values and announcing the directions to the market afterevery six months (International economics N. d). Through this band, it is easy to adapt to theforeign exchange market for short-term volatility and flexibility in the management of currencies.In the event that the exchange rate are above the established band, the monetary Authorityintervenes through buying, selling exchange rates as a guidance back to the band (MAS2001).The authority has its mandate laid out by the Monetary Authority of Singapore Act (1970).

Monetary Policy 4Thirdly, the monetary Authority conducts periodic reviews of the exchange rate policy inorder to ensure consistency with the economic fundamentals. Usually, consistent assessment ofthe movements of exchange rates is very imperative in addressing possible misalignment ofcurrency values .Usually ,six months is the policy review cycle frequency .Following the reviewcycle ,the Monetary Authority issues out a policy statement which provides information on therecent performance of the exchange rates while explaining future positions of the exchange ratepolicy thus strengthening the exchange market and boosting the public understanding of thecountry’s monetary policy standing. Through constant review, the monetary Authority is able toflexibly adapt to short-term fluctuations possible in financial market structure (MAS 2014).Further, the fact that the monetary authority is using the exchange rate as an intermediateand operational tool for its monetary policy implies that the authority lacks control over thecountry’s interest rates and currency supply. Regarding the free flow of capital, it can be said thatthe Singaporean interest rates depend on foreign exchange rate and investor expectations as tothe future of the Singaporean currency. Usually, the Singaporean local interest rates are lower ascompared to that of the United States of America which is a reflection of market expectationsthat the Singapore’s dollar is likely to appreciate eventually (MAS 2014).Due to the endogenousnature of the country’s supply of money, the exchange rate policy approach to monetary policyseems justifiable. Also the endogenous state of the local interest rates make the exchange ratepolicy a better monetary approach (Singapore Government securities N .d).According to the monetary authority’s 2015 January policy statement, there was need toadjust its monetary policy due to the inflationary pressures in the country at the time. As at Oct2014, the S$NEER policy band had experienced no slope, width or level changes hence therewas no need to reassess the 2012 exchange rate policy (Monetary Authority of Singapore

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