Assess whether a “zero appreciation” policy might be the most appropriate in managing the harmful effects of the 2008 Global Financial Crisis in Singapore.
“In April 2009, Singapore’s central bank said it will maintain a zero-appreciation stance to help reverse a collapse in exports.”
Assess whether a “zero appreciation” policy might be the most appropriate in managing the harmful effects of the 2008 Global Financial Crisis in Singapore. [25]
Introduction
Exchange rate policy is a specific form of monetary policy in which exchange rates of a given currency are manipulated by the government to achieve certain macroeconomic objectives within the domestic economy.
Singapore adopts a managed float exchange rate system.
(RWA) The MAS allows the Singapore dollar to float within stipulated policy bands. Within these bands, exchange rate can be determined by demand and supply for the currency. If currency falls beyond the policy bands, MAS will take action to buy / sell the currency to bring the currency back to within the range. The MAS usually promotes a modest and gradual appreciation to deal with imported inflation and therefore maintain price stability.
Explain the harmful effects which could arise from the recent global financial crisis
1. Fall in economic growth (due to fall in AD and NY as a result of fall in C, I and (X – M) àexplain in detail)
2. Rise in unemployment (lower output level required results in firms scaling back on production and therefore reducing their employment of workers since less workers are now required)
How the above policy might be appropriate in managing the most harmful effects
A “zero appreciation” stance will be considered a loosening of monetary policy as opposed to the usual “modest and gradual appreciation” stance.
· This can boost export competitiveness as opposed to an appreciation which can erode away export competitiveness
· Some may argue to implement an “appreciation” policy instead during times of recession àmay not be viable due to the fact that we import most of our inputs used in the manufacturing of our exports.
· An appreciation itself may even bring about higher inflation, which may be undesirable for consumers during times of recession as their purchasing power will be further reduced.
· The best compromise to deal with the harmful effects of the recession might in fact be a zero appreciation stance when it comes to exchange rate / monetary policy in Singapore.
How the above policy might not be the most appropriate
The above policy may do very little to deal with the slower growth and higher unemployment, even if it does prevent the problem from escalating. It should be complemented with other policies, which could stimulate demand and therefore increase economic growth and reduce unemployment. For example:
· Fiscal policy (take into account small multiplier),
· Supply side policy to improve export competitiveness (take into account time lag),
· Government could consider offering some short-term help for firms and consumers through subsidies and one-time grants.
Conclusion
The reason why a zero appreciation policy stance is considered to be ‘most appropriate’ is because it does the least harm to the economy in view of the given set of economic circumstances. The alternatives – a depreciation or an appreciation of the exchange rate may do more harm than good. That said, a zero appreciation stance alone, will not address the harmful impacts caused by the global financial crisis.
(RWA) During the midst of the Global Financial Crisis, Singapore was one of the first economies in the world to fully recover from the recession. This was because of a range of policies implemented, such as the Resilience package which includes the Jobs Credit Scheme, Risk-Sharing Initiative. These policies would likely have contributed towards the recovery. Thus, monetary policy alone would not have been sufficient.
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