Inflation targeting in Singapore. Lessons for Ukraine

Abstract

Russian aggression in Ukraine posed a difficult task for Ukrainian monetary authorities. In order to keep stability of national currency exchange rate the National Bank of Ukraine (NBU) fixed the U.S. dollar exchange rate immediately after the start of the conflict. However, NBU acknowledged that it considers fixed exchange rate as an impediment to inflation targeting, which NBU has chosen as its policy for money and credit since 2014. The main aim of this article is to show that inflation targeting is possible under fixed exchange rate regime. Thus, the problem of policy choice for NBU is not so dramatic. Price stability is compatible with management of exchange rate in both practical and theoretical perspectives. In order to prove this thesis, we will look into Singapore’s experience of targeting inflation with fixed exchange rate.
 Singaporean experience of managing its exchange rate proves that greater flexibility is possible in the context of monetary policy choice. Depending on a situation Singaporean central bank is able to “lean against the wind” and shift swiftly between the corners of “Impossible Trinity” allowing greater control over exchange rate and interest rate in a short-term time horizon. Furthermore, management of exchange rate is compatible with inflation targeting paradigm which is strongly advised for a small-open economy by international financial organizations such as IMF. Singaporean experience also proves that the reaction function of MAS is compatible with the Taylor rule. Eventually, Singaporean economy maintains price stability without committing its monetary policy to interest rate targeting exclusively.