Economics Assignment: The Impossible Trinity

Added on -2020-06-06

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The Impossible Trinity (Will Taylor Rule be better for Singapore?)
AbstractMonetary policy is regarded as macroeconomic policy wherein the monetary authoritymeans central bank of the nation makes policies, rules and regulations to control the supply ofmoney in the country. Monetary Authority of Singapore (MAS) aims at keeping appreciation rateof Singapore’s dollar effective exchange (S$NEER) rate at 0%. It follows inflation-targeting &exchange rate focused monetary policy with free flow of capital and domestic interest rate isdetermined through foreign interest rate comprising time-varying risk premium. Given animpossible trinity, MAS can either choose exchange rate or interest rate as an instrument for themonetary control. Applying the Taylor’s rule in Singapore, MAS needs to charge high rate ofinterest so as to control money supply or vice-versa. Thus, the target of the study is to criticallyinvestigate the Taylor’s rule in Singapore’s open economy through secondary analysis. Thefinding of the thesis presented that in dominant productivity shocks Taylor’s interest rate rule isconsidered as more effective, however, in case of dominant foreign price shocks, exchange raterule is preferable. Moreover, inflation significantly response to the import-price inflation shocksin comparison to the exchange rate. The results concluded that there is no floating fear for theSingapore with the Taylor rule because with the high exchange rate, MAS can improve policyrates in order to derive benefits from the foreign flow of capital and assures appreciatingexchange rate in the future.
Table of ContentsPART- I INTRODUCTION............................................................................................................1Overview of the study..................................................................................................................1Research aims and objectives......................................................................................................3Research question........................................................................................................................3Rationale of the study..................................................................................................................3Structure of the dissertation.........................................................................................................4PART – II LITERATURE REVIEW..............................................................................................41. Current monetary policy framework of Singapore and impossible trinity concept.................42. Application of Taylor’s rule in the monetary policy................................................................6PART III: CONCLUSION............................................................................................................11PART –IV REFERENCES............................................................................................................13
Table of FiguresFigure 1 Impossible Trinity.............................................................................................................2Figure 2 Mundell’s Impossible Trinity............................................................................................6

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