Analysing Singapore's monetary transmission mechanism

Publication Type

Book Chapter

Publication Date

4-2005

Abstract

The Singapore economy has experienced greater business cycle fluctuations in recent years, being subject to recurrent shocks from the external environment. The primary role of monetary policy in such a volatile environment is to react to cyclical fluctuations in inflation and output in order to compensate, at least partially, for the impact of exogenous shocks. However, an understanding of the propagation of monetary policy shocks is essential for good policy making. This study aims at performing a VAR analysis of the monetary transmission mechanism in Singapore. The use of the VAR approach confers the distinct advantage of explicitly allowing for the endogeneity of variables, thereby accommodating the interdependence between monetary policy and economic developments. Dynamic impulse responses produced by the VAR model—with the exception of insignificant price responses—are found to be generally consistent with the conventional view of the monetary transmission mechanism. We further employ the VAR model to investigate another aspect of Singapore’s monetary transmission mechanism, specifically the role of the interest rate as a channel of transmission. First, variance decomposition analysis of the VAR model indicates that the exchange rate is more influential than the interest rate as a source of macroeconomic fluctuations. Second, we compare the output response path to monetary policy shocks when the interest rate is exogenized in the VAR to the baseline response when the interest rate channel is allowed to operate. The results suggest that the interest rate does not even appear to be an important channel for transmitting changes in the exchange rate to the real economy during the sample period investigated.

Keywords

Monetary policy, vector autoregressive model, interest rate, Singapore

Discipline

Asian Studies | Econometrics | Finance | Macroeconomics

Research Areas

Macroeconomics

Publication

The economic prospects of Singapore

Editor

W. T. H. Koh and R. S. Mariano

First Page

274

Last Page

298

ISBN

9789812449542

Publisher

Pearson

City or Country

Singapore

Additional URL

https://worldcat.org/isbn/9789812449542

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