Monetary Stability, Export Promotion, and Exchange Rate Policy: A macro model of exchange rate management in NICs and its application to Singapore 1975–83

Abstract

This study presents a theoretical framework for the analysis of exchange rate and money supply management in small, open newly industrializing countries (NICs) and provides empirical evidence by applying the macro model to a case study of one country belonging to this NIC-group, that is, Singapore. The export-oriented development strategies followed by these countries can be considered rather successful so far. In this context of outward-oriented development, the macro economic performance of alternative exchange rate regimes and monetary policies has to be evaluated with regard to the enhancement of exports as an engine of growth and to the preservation of monetary stability. The assumptions of our macro model present a picture of several stylized facts describing the structural conditions in a representative NIC. The economy, it is assumed, totally depends on imports of consumer goods and raw materials (for example, foodstuff like rice, durable con sumer goods like cars, natural energy resources) because there is no import substitution sector. Domestic production comprises manufactures exported (for example, electronic equipment) and non-tradables consumed at home (for example, various services, local food). Prices of tradables are determined on world markets; the small, open NIC has to accept these prices as exoge nously given. Export prices are denominated in U.S. dollars, import prices are denominated in the currency of the exporting country. Prices of non-tradables are determined by the equilibrium of domestic markets. In analysing macro-economic management in an export-oriented, small, open NIC two target variables are considered: export volume and consumer price level. Taking as a policy of export-led growth ? without exploring the pros and cons of this strategy ? the target of macro policy can be defined as export promotion with stabilization of a low rate of consumer price inflation. Instruments of macro policy are fiscal, monetary, and exchange rate policies. Fiscal policy stimulates growth of exports by tax policies and public investment attracting foreign direct investment and promoting the growth of the domestic stock of real and human capital. However, this aspect of macro policy will be neglected by assuming constant stocks of foreign and domestic capital. The study concentrates on the problems of exchange rate policy and money supply management under the present world monetary order. Under the present system of managed floating and in accordance with IMF-agreements the