The Economy of Singapore
Money Without an Interest Rate Policy
Unlike most central banks, MAS manages the exchange rate rather than an interest rate, because trade is so large relative to the economy.
A small open economy has different tools.
Trade share
Trade is several times the size of GDP, so exchange rate moves affect prices strongly.
The band
MAS lets the Singapore dollar move within a policy band against a basket of currencies.
Adjustments
It steepens or flattens the band to control inflation and growth.
Interest rates
Domestic rates largely follow global ones because capital flows freely.
A stronger currency
A rising Singapore dollar makes imports cheaper and helps fight inflation.
Assuming every central bank sets interest rates
Some use the exchange rate.
Key takeaways
- MAS manages the exchange rate.
- Trade is very large relative to GDP.
- It adjusts a policy band.
- Interest rates follow global levels.
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