Monetary regime choice in Singapore: Would a Taylor rule outperform exchange-rate management?

• Main Authors: CHOW, Hwee Kwan, LIM, G. C., McNelis, Paul D.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Inflation targeting; Taylor rule; Exchange-rate management; DSGE-VAR estimation; Asian Studies; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1524; https://ink.library.smu.edu.sg/context/soe_research/article/2523/viewcontent/Singapore_Jan2010.pdf
• Institution: Singapore Management University

This paper adopts a dynamic stochastic general equilibrium-vector autorgressive (DSGE-VAR) approach to examine the managed exchange-rate system at work in Singapore. We examine if the country has any reason to fear floating the exchange rate and adopting a Taylor rule. Our results show that, in terms of overall inflation volatility, the exchange rate rule has a comparative advantage over the Taylor rule when export price shocks are the major sources of real volatility, while a Taylor rule dominates when domestic productivity shocks drive real volatility. The exchange-rate rule also dominates the Taylor rule for reducing inflation persistence.