Monetary Policy in Singapore and the Global Financial Crisis

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Challenges for the Singapore Economy

The results suggest that the growth rates of asset prices in

Singapore fall by a much greater extent than the growth rates of out-

put and inflation when there is a contractionary monetary policy

shock. This implies that monetary policy might indeed be effective in

leaning against upswings in property and stock prices in Singapore.

Furthermore, housing asset inflation contributes about 18% to

changes in consumer price inflation after 4 years so monetary policy

could lean against the build-up of asset price misalignments even if

near-term inflation pressures remain relatively subdued.

These results are, of course, preliminary and more work will need

to be done to see if there are links in the data through which mone-

tary policy could influence asset prices. The dynamics here are also

very difficult to model since monetary policy actions are unlikely to

have only temporary effects so a strong monetary policy reaction to a

potential asset price bubble may risk having significant collateral dam-

age to GDP growth in the longer period. Also the model does not

explicitly take into account the Uncovered Interest Parity or UIP

relationship which seems to hold for Singapore empirically and sug-

gests that a strengthening currency to offset a bubble would lead to

stronger capital inflows and a further stimulus to asset prices through

downward pressure on domestic interest rates. Given the constraints

under which the MAS operates, including extreme vulnerability to

external shocks and the use of only one effective instrument (the

TWS$) to deal with multiple objectives, it is difficult to envisage that

it would also want to use monetary policy to address bubbles any

time soon. Nonetheless the global financial crisis has made it more

likely that central banks, such as the MAS, will have to monitor bub-

bles more closely than they have done in the past, make policy

statements about them beyond Alan Greenspan’s famous ‘irrational

exuberance’, and communicate their views to the public.

It may be difficult to identify a bubble but this does not preclude

central banks from extracting information provided by asset price devel-

opments on the outlook for output and inflation in the medium term

and responding to rising asset prices, albeit in a more muted fashion, if

they judge that sufficient is known to suggest that prices are moving

well beyond what the fundamentals might suggest. For example, given

Monetary Policy in Singapore and the Global Financial Crisis

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