Monetary Policy in Singapore and the Global Financial Crisis

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b1110

Challenges for the Singapore Economy

the likely correlation between credit cycles and asset price cycles, moni-

toring variables, such as ‘credit’ growth, which may have some causal

impact on asset price bubbles can provide a practical way of dealing with

the situation and would make communication to the public simpler. On

the other hand, monetary policy that acts too narrowly in terms of pay-

ing insufficient attention to signs of financial vulnerability may itself

encourage the run up in asset prices. In other words, financial stability is

ultimately to some degree endogenous to monetary policy.

There is also need for monetary policy to work in tandem with

financial policies on macro-prudential regulation and supervision even

though the linkages between asset prices, financial instability and

monetary policy are complex, if only to reduce the pro-cyclicality of

credit cycles in order to combat instabilities caused by asset price bub-

bles. If the circumstances that call for preemptive monetary

restrictions can also be inferred from weaknesses in private sector

balance sheets and prevailing market expectations, as well as from

movements in macroeconomic variables, such as output growth and

headline inflation it follows that there should be coordination between

the monetary and prudential authorities. In this way an analysis of

monetary conditions and financial flows can provide important com-

plements to the usual macroeconomic models used by central banks.

Since supervisory and macro-prudential policies are also the responsi-

bility of MAS, this should be an easier task than in other countries

where they have either been divested on the assumption that financial

markets are generally efficient, or are located in separate and often

competing institutions, as in the UK before the crisis.

END NOTES

Abeysinghe, T and K M Choy (2007). 

The Singapore Economy: An

Econometric Approach

. London: Routledge.

Asian Development Bank (2009). Enduring the uncertain global environ-

ment: Anatomy of a global crisis. 

Asian Economic Outlook

. Manila: Asian

Development Bank.

Bernanke, B and M Gertler (2001). Should central banks respond to move-

ments in asset prices? 

American Economic Review

, 91(2), 253–257.

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C. H. Kwan and P. Wilson

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