Managed Float Exchange Rate System: The Singapore Experience

Abstract

This paper examines the key characteristics of Singapore's exchange rate-centered monetary policy; in particular, its managed float regime which incorporates key features of the basket, band and crawl system popularized by Williamson (1998, 1999). We assess how the flexibility accorded by this framework has been advantageous in facilitating adjustment to various shocks to the economy. A characterization of the countercyclical nature of Singapore's exchange rate policy is also offered, with reference to recent work on the monetary policy reaction function and estimates of Singapore's behavioral equilibrium exchange rate. We also review previous econometric analysis which provides evidence that Singapore's managed float system may have helped to mitigate the spillover effects of such increased volatility into the real economy. The track record of Singapore's managed float regime over the past two decades suggests that intermediate regimes are a viable alternative to the so-called "corner solutions", especially when supported by consistent macroeconomic and microeconomic policies as well as strong institutions.

Monetary Policy and Financial Sector Development

“…10 This is consistent with the well-known "policy trilemma" (see Obstfeld et al, 2005). Uncovered Interest Parity (UIP) also appears to hold remarkably well for Singapore (Khor et al, 2007) as the SGD Interbank rate (SIBOR) is usually below the USD Interbank rate in Singapore, except when USD rates are artificially pushed down toward zero as a result of FED quantitative easing. For an interesting recent explanation as to why UIP seems to hold for Singapore, see Mihov (2013).…”

The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar

“…22 See Khor et al (2007) for an assessment of Singapore's experience with the managed floating exchange rate system. Singapore's exchange rate system is characterized by the so-called BBC (Basket, Band and Crawl) principle popularized by Williamson (1998).…”

Managing the Monetary Consequences of Reserve Accumulation in Emerging Asia

“…(Rhee & Lee, 2005, p. 205) Also see the survey of selected central banks by Mihaljek (2005). 13 Even in the case of Singapore which is a basket pegger, Cavoli and Rajan (2007) show that the central bank loss function can be modeled in terms of output and inflation, the only difference being that they use the nominal effective exchange rate (NEER) rather than the interest rate as the policy instrument (also see Khor et al, 2004). 14 While one should ideally use NEER, we use bilateral US dollar rates as it substantially eases model solution.…”