Read the Exchange Rate Policy at the Monetary Authority of Singapore

Read the Exchange Rate Policy at the Monetary Authority of Singapore”. Your team should be prepared to discuss the case and the following questions.

• Why and how are the capital and current account tied together so closely?

There is an intrinsic relationship between the current account and capital account and they function like a balance sheet, in the effect that they have to net out to zero

• What is a real exchange rate?

The real exchange rate is based on buyer power, Purchasing Power parity (PPP) it allows comparison between countries based on their % wealth and buying power so that one is able to compare apples with apples.

• What do you think determines the exchange rate in the long run?

-Differentials in Inflation

Singapore inflation should not exceed maximum inflation level of 2%, hawkish view on inflation. However, in 1990 inflation in Singapore peaks at 3%. It trends downward from 1990-1997 and then spikes again in the Asian financial crisis above the target level of 2%.

- Differentials in Interest Rates.

Singapore has low interest rates at present of 0.01 percent. At the height of the Asian crisis Singapore have interest rate of 10% which has gradually trended down to almost 0, and has been between 0-4% since that time.

- Current-Account Deficits

Singapore’s last current account deficit was in 1980. They have current account surplus since this period.

- Public debt

Singapore’s public is around 110% of G.D.P as of 2011, prior to this it has sat at around 100%.

- Terms of trade

Singapore has terms of trade which have come down from a high of a 130 units in 1980 to 83 units in 2010. This suggests that Singapore have moved away from a export lead economy and transformed into a service based economy, this means when they have 83 they are imported more goods than they are exporting.

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