Monday, 10 April 2006

Singapore first quarter GDP and currency regime

Singapore today reported advance estimates for first quarter GDP. From the Ministry of Trade and Industry:

The Singapore economy grew at a faster pace in the first quarter of 2006. Advance estimates show that real gross domestic product (GDP) rose by 9.1 per cent in the quarter compared to the same period in 2005. On a quarter-on-quarter seasonally adjusted annualised basis, real GDP grew by 1.2 per cent, easing from the 12.5 per cent expansion in the preceding quarter.

Singapore's economy, of course, is mainly about exports. Its recent export performance has been quite robust, non-oil domestic exports (NODX) rising 17 percent year-on-year in February after an 18 percent rise in January. This rate of growth is barely slower than the 18.6 percent rate of the fourth quarter of 2005.

For the whole of 2005, Singapore's NODX had hit 80 percent of GDP. Such a high figure reflects Singapore's dependence on trade and explains why it manages its currency exchange rate rather than interest rates as part of its monetary policy, as explained in a paper entitled "Singapore's exchange rate-centered monetary policy regime and its relevance for China" (in PDF) by Bennett T McCallum of Carnegie Mellon University and the National Bureau of Economic Research. From the abstract:

Although the policy regime of the Monetary Authority of Singapore is centered on exchange rate management, it is fundamentally different from a traditional fixed exchange rate arrangement. Instead, the exchange rate (a trade-weighted index) is important primarily in its role as an intermediate information or "instrument" variable in a procedure used to achieve the primary objective of low inflation, with some consideration also given to employment. Thus the exchange rate plays a role much like that of an overnight interest rate in the United States or Japan, among other countries. Here a calibrated structural model of a small open economy is used to illustrate this process and to demonstrate the attractiveness of an exchange-rate policy rule, relative to an interest-rate rule (designed in each case to achieve macroeconomic objectives) in economies with high ratios of foreign trade to GDP. These characteristics and results form the basis of an argument that the new exchange rate regime adopted by China in July 2005 is unlikely to resemble the Singapore system.

1 comment:

Tax Shelter said...

Another interesting regime that targets currency is Mexico.

While data from the real world shows that there is a strong relationship between currency and inflation, one could not say the same between interest rate and inflation. In this sense, our Fed is pursuing a regime based on fantasy, that may not work (or at least doesn't work well) in the real world.

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