Singapore: Selected Issues

This Selected Issues paper estimates the exchange pass-through to inflation in Singapore with a particular focus on the role of labor market conditions. The paper first finds a strong exchange rate pass-through to inflation in Singapore, after accounting for the potential endogeneity of changes in the exchange rate. Further, it uncovers that labor market tightness dampens exchange rate pass-through and therefore could weaken monetary policy transmission. Overall, the results suggest that monetary policy should be more vigilant under a tight labor market condition. Under tight market conditions, the pass-through is found to be severely weakened and more so for the service components of the consumer price index basket. Overall, our findings suggest that the exchange rate-based monetary policy serves Singapore well, but it would need to be more vigilant when the labor market is tight. The paper then draws policy implications for taming inflation under tight labor market conditions. Further, policies designed to ease structural labor market tightness could help support monetary policy to ensure price stability in Singapore. This is consistent with a recent study on the US that suggests that dealing with the inflationary pressures originating from a tight labor market would require policy actions that bring labor demand and supply into a better balance.