Assess whether price stability should take precedence over other macroeconomic objectives in Singapore's current economic climate.
Singapore’s post-pandemic recovery continues to face various risks and uncertainties, both locally and globally. As global inflation rises—driven by border restrictions and supply chain disruptions—the Monetary Authority of Singapore responded by tightening monetary policy through a modest increase in the pace of appreciation of the Singapore dollar.
b. Assess whether price stability should take precedence over other macroeconomic objectives in Singapore's current economic climate. [15]
Introduction
In any economy, price stability is a key macroeconomic objective as it forms the foundation for sustainable economic growth, investor confidence, and the protection of consumers’ purchasing power. Price stability typically refers to a low and stable inflation rate, usually targeted around 2%. In Singapore’s current economic climate, where global inflationary pressures have emerged due to pandemic-induced supply chain disruptions and rising energy costs, the need to manage inflation has become especially pressing. The Monetary Authority of Singapore (MAS) has responded by tightening monetary policy, allowing for a modest and gradual appreciation of the Singapore dollar (SGD) in order to mitigate these inflationary threats.
The consequences of not achieving price stability
Allowing inflation to persist above 2%—such as the 6% inflation rate Singapore experienced in 2022—poses serious economic risks. High inflation erodes the purchasing power of consumers, meaning that the same amount of income can now purchase fewer goods and services. This can severely impact the material standard of living, especially for lower- and middle-income households who spend a larger proportion of their income on necessities like food, housing, and transportation. In an already uncertain post-pandemic environment, rising costs can intensify anxiety and reduce overall consumer confidence.
Furthermore, high inflation can undermine Singapore’s export competitiveness. If Singapore’s inflation is higher relative to its trading partners, then the prices of its goods and services in foreign markets become less attractive. This could lead to a fall in export demand, negatively impacting Singapore’s balance of trade and, in the longer term, GDP growth and employment in export-oriented sectors. As a small and open economy that depends heavily on trade and imports for both consumption and production, it is essential for Singapore to guard against inflation spiraling out of control.
Trade-offs involved in maintaining price stability
To control inflation, MAS typically manages the exchange rate by allowing the SGD to appreciate gradually and modestly. This approach has several important effects:
A stronger SGD makes imported goods, including necessities like food and energy, cheaper in local currency terms. This helps to directly reduce imported inflation, which is significant in Singapore due to its heavy reliance on imported goods.
A stronger SGD reduces the cost of imported raw materials and intermediate inputs used by firms. This lowers production costs, enabling a rightward shift in short-run aggregate supply (SRAS), thereby lowering the general price level (GPL) and reducing cost-push inflation.
A stronger SGD also makes Singapore's exports more expensive in foreign currency terms, leading to a potential fall in export demand. This results in a decline in net exports (X–M), a fall in aggregate demand (AD), and thus a reduction in demand-pull inflation.
However, this comes at a cost. A decline in net exports due to a stronger SGD can lead to a contraction in AD, reducing real national income (real NY) and potentially leading to slower economic growth or even a recession. As firms receive fewer orders, they may scale down production and hiring, which would result in rising unemployment. The fall in exports could also worsen Singapore’s balance of trade (BOT) and, by extension, the balance of payments (BOP).
These trade-offs are particularly sensitive in the current climate. While inflation poses real and urgent threats, Singapore’s recovery from the pandemic remains uneven across sectors. Travel and hospitality, for instance, may still be lagging behind. The decision to prioritise inflation control via exchange rate appreciation must thus be carefully weighed against the possibility of derailing a fragile economic recovery.
Balancing price stability with other macroeconomic objectives
While price stability is crucial, it should not be pursued at the complete expense of other key macroeconomic objectives such as sustained economic growth and low unemployment. In a post-pandemic recovery phase, the government must adopt a multi-pronged approach that ensures long-term resilience.
To support both price stability and economic growth, the Singapore government can complement MAS’s exchange rate policy with supply-side policies. For example, providing grants and subsidies for firms to adopt automation, invest in R&D, or retrain workers can help raise productivity. As productivity rises, the long-run aggregate supply (LRAS) curve shifts rightward, which increases real output while reducing inflationary pressures. This achieves the dual objective of higher economic growth and lower inflation.
Such policies can also stimulate investment by lowering production costs and improving efficiency, thereby encouraging firms to expand. This shift in both LRAS and AD can lift real national income and create employment opportunities without stoking inflation, especially if growth is driven by enhanced capacity and innovation rather than mere demand expansion.
Conclusion: A dynamic policy stance is needed
In conclusion, while price stability is undoubtedly a priority—especially in light of elevated inflation levels in 2022—it should not be pursued in isolation. The MAS is right to respond to imported inflation by allowing the SGD to appreciate. However, policymakers must remain vigilant. Should inflationary pressures ease, or should global economic conditions worsen—such as a recession in major trading partners like the United States—Singapore may need to shift towards a more accommodative stance, including pausing the appreciation of the SGD to support economic growth and employment.
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