Exchange Rate Policy at the Monetary Authority of Singapore free essay sample

Introduction The report and presentation we are about to criticize is extremely well done. We would like to say that we agree in almost every part since it was done in a very theoretical manner. Somewhat hard to criticize because it is book proof university knowledge. However, we will focus our critics on bringing actually the case nearer to the audience, since we believe it is far easier to keep in mind facts and figures rather than just theoretical background. The presentation was far away from the actual case, concerning Singapore. We missed specific data and facts about how it was highly interesting that, that small country created and managed its own monetary and exchange rate solution, and did a great job with it. We will be focusing on the special effects and consequences Singapore’s monetary policy brings with it, while using the original groups report as a baseline. We will somehow try to make it more approachable, by adding examples. We will write a custom essay sample on Exchange Rate Policy at the Monetary Authority of Singapore or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 1. Why and how are capital and current account tied together so closely? This  was answered clearly by the group. We already learned in class how these two aspects balance (or not). Still be would like to add how special the situation of Singapore was, because when we open our finance book, we will not find the case of Singapor. They had a positive CA and FA (financial account). This was possible mainly due to the high savings rate of people and the good economic development. (see graphic in presentation). Owing to its small size and lack of natural resources Singaporean authorities made its economic strategy target in exports and make the country a financial hub. Singapore has the 2nd busiest port in the world Half of the world’s yearly supply of crude oil is refined in Singapore. A fifth of the World’s containers passes through Singapore port. Another rathercuriousg aspect is really how much reserves Singapore has compared to others. Despite its size, it is listed right after India, what is really motivating. 2. What is a real exchange rate? Again a definition and an equation were already given by the group. We would like to add an example, to make sure people understand the equation and the background. If we have an inflation of 2% in our home currency, and our home currency appreciates towards the extra currency; then the real exchange rate wouldn’t change at all. Another very plastically approach is using the way of the apple given by the group. With the real exchange rate, we compare apples and not the money used. We want to know how many apples equal how many apples in different countries. Here the Big Mac Index could be a helpful tool. 3. What do you think determines exchange rates in the long run? All details were listed accurately. We would just like to add. That after all monetary and fiscal policy things, the most important aspect is a well functioning and high in demand economy. This point brings together every small points listed, because without a good and competitive industry, there is no use of any policy. In our view, here the group has lost track a little bit of the big picture. Secondly we would again like to refer to the explicit case of Singapore and its crawling-band. The group didn’t mention (or not very  clearly referring to Singapore) that in the long run, the credibility of the MAS is also influencing the exchange rate. Because if the MAS has a high credibility and the rate rises up to the outer band, investors will stop putting money in this currency because they know MAS will intervene. So it regulates itself, what is quite fascinating. 4. How do exchange rates interact with trade balances and fiscal policies? Here the group invented a very detailed theoretical case, to demonstrate how the three components play together. They mentioned quite a range of factors and they lost themselves and/or the audience a bit in the details. It remains very speculative again, and doesn’t mention about the very interesting procedure of the Singapore government or MAS. We want to shortly describe how they actually dealt with it and stay focused on the main aspects. The daily task of the MAS reminds us of a planned economy. Every morning they get information about planned transactions and trades that will happen today, so they can plan and calculate how much money will be needed, so that there are no huge short term currency fluctuations. This includes payments such as government transfers and issuance of government securities and all sort of money flow that we can imagine. In 1997, the Asian area got attacked by speculators, because a rising fear that Thailand couldn’t pay back debts. Singapore managed to defend itself against the attacks but still was deeply impacted. MAS economists realized that the real exchange rates would have to fall in that region and that there are only two ways this could happen: Either the nominal exchange rate has to fall, or the price niveau had to adjust. However, the credibility of MAS was crucial for the success and stability of Singapore. So Singapore then actually widened the crawl band and reduced government spending. for the long run this means that the current will fallïÆ'  exports will increase (income will increase (more money supply (increasing prices! 5. What are the advantages and disadvantages are of fixed vs. Floating exchange rate? We find that this point has been worked out very well and quite understandable. However, we would like to draw attention again to the case, and apply this given theoretical background to see the advantages for Singapore in his choice of exchange rate system. A very important point is  the size and power of a country. Looking at our picture below it gets quite obvious why Singapore chooses not a complete â€Å"liberated† floating exchange rate like America, simply because it is very small and more sensitive to shocks and not so powerful. Also there is not this huge diversification possible. Natural catastrophes would completely destroy Singapore, whereas America would take damage, but would still function in its core probably. 6. How are changes in actual exchange rates manifested under fixed and floating exchange rate regimes? Once again nice work done. Hence it stays very hypothetical, we created a graphic just to underline all things mentioned by the group. Its supposed to be a trade off between costs and risk. To put it into very easy words so that people can understand better: fixed rate: its costly but less sensitive and not so risky for the country. Floating rate: â€Å"no† costs, but exposed to risk and deflation/ inflation what can also be referred to as costs. Conclusion We agree with the groups conclusion. We must appreciate theyre well done and precise thought thru presentation. We tried to add what we considered can make the topic more interesting and memorable, because Singapore is a very interesting case where we can learn from a lot.