Need Singapore Fear Floating? A DSGE-VAR Approach

This paper uses a DSGE-VAR model to examine the managed exchange-rate system at work in Singapore and asks if the country has any reason to fear floating the exchange rate with a Taylor rule inflation-targeting mechanism that uses the short term interest rate instead of the exchange rate as the benchmark monetary policy instrument. Our simulation results show that the use of a more flexible exchange rate system will reduce volatility in inflation and investment but consumption volatility will increase. Overall, there are neither signi…ficant welfare gains or losses in the regime shift. Given the highly open and trade dependent nature of the Singapore economy where the policy preference is for exchange rate stability, there is no impetus to abandon the present monetary regime.