Singapore'S Exchange Rate Policy: Some Implementation Issues

Reflecting the small open nature of its economy, Singapore has adopted an exchange rate-centered monetary policy framework since 1981. The exchange rate regime in Singapore is an intermediate regime that follows the basket-band-crawl system. With this managed float system, the MAS has successfully deterred speculators from attacking the domestic currency for most of the past three decades. At the same time, the flexibility accorded by the managed float system aided Singapore in escaping from the 1997–1998 Asian crisis relatively unscathed. In order to advance our understanding of the hitherto successful operation of Singapore's exchange rate policy, we examine the following three aspects of its implementation: (i) the use of the exchange rate instead of the interest rate as the key monetary policy instrument; (ii) the management of the currency basket in terms of foreign exchange intervention operations; and (iii) regulating the level of domestic liquidity alongside exchange rate policy. This paper also provides some insights on the challenges ahead that potentially face policymakers when implementing Singapore's exchange rate policy.