International Monetary Fund. Asia and Pacific Dept
INTERNATIONAL MONETARY FUND
This Selected Issues Paper discusses some observations on Singapore's monetary policy framework. Singapore's monetary policy uses the nominal effective exchange rate (NEER) as the instrument in a basket-band-crawl framework. The paper finds that under some conditions an exchange rate-based monetary policy may not be detrimental to external competitiveness. A key parameter is the weight of imports in the consumer basket or production function. Tightening monetary policy through a nominal appreciation helps to dampen imported cost pressures. In addition, nominal appreciation can reduce domestic sources of inflation by lowering demand for local factors of production.