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Abstract
Abstract. This study considers the correlation among the Consumer Price Index (CPI), the Singapore /US dollar exchange rate, and the Singapore overnight rate average from 2012 to 2023 in Singapore. This small and open economy effectively manages its monetary policy to maintain a healthy inflation rate but has experienced high inflation rates and slow economic growth, raising questions about the effectiveness of the floating exchange rate system adopted by the Monetary Authority of Singapore in recent years. This study employs unit root and cointegration tests, impulse response functions, and variance decomposition. According to the vector error correction model specification, the production function primarily facilitated short-term adjustments toward long-term equilibrium; however, these adjustments were gradual, and it took more than two years to respond to system shocks. Analyses of the impulse response functions and variance decomposition indicate that changes in the variables resulted in analogous behavior patterns, with notable effects that primarily differ in their response to shocks. The empirical evidence supports the view that inflation controls are more sensitive to interest rate adjustment in Singapore. The findings of the present research provide valuable insights and have numerous important implications for the macroeconomic evaluation of Singapore. The study acknowledges that economies are subject to unforeseen events like global crises or pandemics, which can impact exchange rates and inflation beyond the scope of policy measures, and these might not be fully captured in the study.
Keywords: Consumer price index, singapore overnight rate average (sora), monetary authority of singapore, free economy, monetary policy, foreign exchange policy
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This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Copyright @2017. This is an open-access article distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License (http://creativecommons.org/licenses/by-nc-sa/4.0/) which permits unrestricted non-commercial used, distribution and reproduction in any medium
References
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- Banton, C. (2021, March 26). Cost of Living: Definition, How to Calculate, Index, and Example. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/c/cost-of-living.asp
- Campa, J. M., & Goldberg, L. S. (2005). Exchange Rate Pass-through into Import Prices. The Review of Economics and Statistics, 87(4), 679–690. http://www.jstor.org/stable/40042885
- Chen, Z., Khoo, K. J., & Chan, H. W. (2018). Monetary policy transmission through exchange rate channel: A VAR analysis of Singapore's monetary policy. Singapore Economic Review, 63(1), 1-22.
- Clarida, R. H., Gaĺı, J., & Gertler, M. (2002, July 1). A simple framework for international monetary policy analysis. Journal of Monetary Economics. doi: 10.1016/s0304-3932(02)00128-9
- Engel, C., & Rogers, J. H. (1996). How Wide Is the Border? The American Economic Review, 86(5), 1112–1125. http://www.jstor.org/stable/2118281
- Fernando, J. (2023, May 10). Inflation: What It Is, How It Can Be Controlled, and Extreme Examples. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/i/inflation.asp
- Fernando, J. (2023, May 10). Consumer Price Index (CPI) Explained: What It Is and How It’s Used. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/c/consumerpriceindex.asp
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- Heakal, R. (2021, June 23). What Central Banks Do. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/articles/03/050703.asp#:~:text=Central%20banks
- Hodrick, R. J. (1987). The empirical evidence on the efficiency of forward and futures foreign exchange markets. Carnegie-Rochester Conference Series on Public Policy, 27, 361-414.
- Jón Helgi Egilsson (2020) How raising interest rates can cause inflation and currency depreciation, Journal of Applied Economics, 23:1, 450-468, doi: 10.1080/15140326.2020.1795526
- Kenton, W. (2023, March 14). Federal Discount Rate: Definition, vs. Federal Fund Rate. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/f/federal_discount_rate.asp
- Levy-Yeyati, E., & Sturzenegger, F. (2003 Lim, G. C., & Chia, N. W. (2013). Challenges in conducting monetary policy amidst external shocks and financial market volatility. Singapore Economic Review, 58(2), 1350005.
- Lim, G. C., & Ng, C. H. (2008). Monetary policy transmission mechanism in Singapore: A VAR approach. Journal of Asian Economics, 19(1), 53-63.
- Lim, G. C., & Ng, T. T. (2008). Monetary policy, exchange rate regime, and financial market integration. Singapore Economic Review, 53(2), 245-261.
- Mapa, N. (2023, May 11). Singapore: High inflation and slowing trade make for a challenging year. ING Think. https://think.ing.com/articles/singapore-high-inflation-and-slowing-trade-make-for-a-challenging-year
- Mishkin, F. S., & Simon, J. (1995). An empirical examination of the Fisher effect in Australia. The Economic Record, 71(213), 217-229.
- Monetary Authority of Singapore. (2023, April 20). Monetary Policy Framework. Retrieved Jun 09, 2023, from
- https://www.mas.gov.sg/monetary-policy/singapores-monetary
- Monetary Authority of Singapore. (2020, October 02). How does MAS carry out its monetary policy? Retrieved Jun 09, 2023, from https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-4
- Rosenberg, E. (2023, April 19). What’s the Ideal Inflation Rate, and How Does the Fed Plan to Get Us There. NASDAQ. https://www.nasdaq.com/articles/whats-the-ideal-inflation-rate-and-how-does-the-fed-plan-to-get-us-there
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- Valente, G. (2009, October 1). International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore. Journal of International Money and Finance. doi: 10.1016/j.jimonfin.2008.10.002
References
Balassa, B. (1964). The Purchasing-Power Parity Doctrine: A Reappraisal. Journal of Political Economy, 72(6), 584–596. http://www.jstor.org/stable/1829464
Banton, C. (2021, March 26). Cost of Living: Definition, How to Calculate, Index, and Example. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/c/cost-of-living.asp
Campa, J. M., & Goldberg, L. S. (2005). Exchange Rate Pass-through into Import Prices. The Review of Economics and Statistics, 87(4), 679–690. http://www.jstor.org/stable/40042885
Chen, Z., Khoo, K. J., & Chan, H. W. (2018). Monetary policy transmission through exchange rate channel: A VAR analysis of Singapore's monetary policy. Singapore Economic Review, 63(1), 1-22.
Clarida, R. H., Gaĺı, J., & Gertler, M. (2002, July 1). A simple framework for international monetary policy analysis. Journal of Monetary Economics. doi: 10.1016/s0304-3932(02)00128-9
Engel, C., & Rogers, J. H. (1996). How Wide Is the Border? The American Economic Review, 86(5), 1112–1125. http://www.jstor.org/stable/2118281
Fernando, J. (2023, May 10). Inflation: What It Is, How It Can Be Controlled, and Extreme Examples. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/i/inflation.asp
Fernando, J. (2023, May 10). Consumer Price Index (CPI) Explained: What It Is and How It’s Used. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/c/consumerpriceindex.asp
Hamilton, J. D. (1983). Oil and the Macroeconomy since World War II. Journal of Political Economy, 91(2), 228–248. http://www.jstor.org/stable/1832055
Heakal, R. (2021, June 23). What Central Banks Do. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/articles/03/050703.asp#:~:text=Central%20banks
Hodrick, R. J. (1987). The empirical evidence on the efficiency of forward and futures foreign exchange markets. Carnegie-Rochester Conference Series on Public Policy, 27, 361-414.
Jón Helgi Egilsson (2020) How raising interest rates can cause inflation and currency depreciation, Journal of Applied Economics, 23:1, 450-468, doi: 10.1080/15140326.2020.1795526
Kenton, W. (2023, March 14). Federal Discount Rate: Definition, vs. Federal Fund Rate. Investopedia. Retrieved Jun 09, 2023, from https://www.investopedia.com/terms/f/federal_discount_rate.asp
Levy-Yeyati, E., & Sturzenegger, F. (2003 Lim, G. C., & Chia, N. W. (2013). Challenges in conducting monetary policy amidst external shocks and financial market volatility. Singapore Economic Review, 58(2), 1350005.
Lim, G. C., & Ng, C. H. (2008). Monetary policy transmission mechanism in Singapore: A VAR approach. Journal of Asian Economics, 19(1), 53-63.
Lim, G. C., & Ng, T. T. (2008). Monetary policy, exchange rate regime, and financial market integration. Singapore Economic Review, 53(2), 245-261.
Mapa, N. (2023, May 11). Singapore: High inflation and slowing trade make for a challenging year. ING Think. https://think.ing.com/articles/singapore-high-inflation-and-slowing-trade-make-for-a-challenging-year
Mishkin, F. S., & Simon, J. (1995). An empirical examination of the Fisher effect in Australia. The Economic Record, 71(213), 217-229.
Monetary Authority of Singapore. (2023, April 20). Monetary Policy Framework. Retrieved Jun 09, 2023, from
https://www.mas.gov.sg/monetary-policy/singapores-monetary
Monetary Authority of Singapore. (2020, October 02). How does MAS carry out its monetary policy? Retrieved Jun 09, 2023, from https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-4
Rosenberg, E. (2023, April 19). What’s the Ideal Inflation Rate, and How Does the Fed Plan to Get Us There. NASDAQ. https://www.nasdaq.com/articles/whats-the-ideal-inflation-rate-and-how-does-the-fed-plan-to-get-us-there
Tradingeconomics. (n.d.). Singapore Inflation Rate. Retrieved Jun 09, 2023, from https://tradingeconomics.com/singapore/inflation-cpi
Valente, G. (2009, October 1). International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore. Journal of International Money and Finance. doi: 10.1016/j.jimonfin.2008.10.002