Is Exchange Rate Centred Monetary Policy Asymmetric? Empirical Evidence from Singapore

Abstract

ABSTRACT The effectiveness of an exchange rate based monetary policy rule for Singapore given the highly open nature of the economy has been empirically well documented in the literature. However, what is somewhat less recognized is that monetary policy in Singapore has historically been conducted in an asymmetric manner where there is willingness to allow for greater appreciation of the nominal effective exchange rate (NEER) during boom periods to curb inflation but not to implement a policy of depreciation during a downturn, i.e. a strong Singapore dollar (SSD) policy. We contribute to the literature by being one of the first to test the empirical validity of a SSD policy. We do so by estimating a Taylor style monetary policy rule (MPR) for Singapore with NEER as the main instrument of policy using monthly data for 2000 to 2019. Our empirical findings suggest that Singapore’s MPR appears to react asymmetrically to inflation and output above a particular threshold but is predominantly concerned with inflation in the policy rule, offering evidence of a policy position consistent with SSD in that it allows for disproportionately higher NEER in boom periods.