Abstract

A computable general equilibrium (CGE) model of the Singapore economy is simulated to project the impact of the appreciation of the Singapore dollar under different export demand elasticity scenarios. The macroeconomic and sectoral results are not very sensitive to variations in the export demand elasticities over the elastic range. A significant change in the projections is apparent when highly inelastic export demand curves are adopted. These results are consistent with the economic performance of Singapore over recent years under the strong currency regime. The analysis thus supports the belief that Singapore is coming to enjoy some degree of market power in the world trade of manufactures. 1 Introduction The Singapore dollar has appreciated since 1980 against all other main currencies. This is an outcome of a deliberate policy that has been aimed at insulating domestic prices from imported inflation. Prior to the 1985 recession, the burden of the anti-inflation policy was placed on wage restraint under the National Wage Council guidelines. However, this wage policy became unsustainable due to the tight labour market situation and the growing significance of a relatively labourintensive service sector in the national economy. While the Singapore Government has recognized the causal link between real wage costs and international competitiveness, it has accepted its limited ability to influence money wages as an anti-inflationary instrument as the economy tends to mature. It is in the light of this setting that the exchange rate has become an intermediate target of monetary policy and the domestic price stability as its final target. The monetary authorities of Singapore aim to keep inflation low and stable, which means at less than 3 per cent. In setting this target, the current and projected inflation pressures are taken into consideration. In the case of the latter, the medium-term outlook for both foreign inflation and domestic unit labour costs play a significant role. If these factors are likely to accelerate the inflation to unacceptable levels, the exchange rate is allowed to appreciate sufficiently to reduce imported inflation. The appreciation is also expected to dampen domestic demand pressure in order to maintain domestic price stability (Bercuson 1995). The precise impact of this exchange rate movement on reducing domestic inflation and the country's performance in external trade are dependent to a large extent upon Singapore's market power in world markets. Given the fact that Singapore's exports, mainly manufactures, account for about 1.5 per cent of the world exports' and retained imports represent 1.7 per cent of world imports, the small country assumption seems applicable to its international trade. However, there is uncertainty over export demand elasticities associated with manufacturing exports because accurate estimates of such elasticities are very scanty for a country like Singapore (Athukorala and Riedel 1991).2 In this article we attempt to use a computable general equilibrium (CGE) model of the Singapore economy (Siriwardana 1991; 1997) to simulate the impact of the appreciation of the Singapore dollar by adopting different values of export demand elasticities. The CGE methodology is a useful technique to gauge the sensitivity of the exchange rate policy to different export demand scenarios, especially when the magnitude of the relevant elasticity parameters is uncertain. It is observed that the model projections are not very sensitive to variations in the export demand elasticities over the elastic range. When extremely low values are adopted (that is inelastic export demand curves), there is a significant change in the projections. The article is organized as follows: section 2 provides a brief outline of the main structural features of the Singapore economy. In section 3, a description of the CGE model of the Singapore economy is presented. …

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