Monetary and Fiscal Policy Interaction in a Small Open Economy: The Case of Singapore

Abstract

In Singapore, the ‘conventional view’ on the interaction between monetary and fiscal policy is that monetary policy has been traditionally expansionary so as to offset a traditionally contractionary fiscal policy. Since about 1978, that policy mix has been justified by the Monetary Authority of Singapore’s targeting, or monitoring, of a trade-weighted basket of currencies with the ultimate objective of controlling inflation. This paper calculates alternative measures of the fiscal and monetary policy stances in a small open economy to gauge the stance of macroeconomic policies in Singapore in the period 1966–95. The results challenge the ‘conventional view’ held in Singapore that fiscal policy has been mostly contractionary, and that monetary policy has been mostly expansionary during the period 1966–95. It also questions the ‘conventional view’ that a contractionary fiscal policy necessarily tends to appreciate the currency. The results have implications for the management of capital inflows.