Sustainable exchange rate and wage policies : the case of Singapore.

Abstract

In Singapore, the exchange-rate policy plays a crucial role in ensuring low inflation, which is a vital condition for economic growth. Through the gradual appreciation of the Nominal Effective Exchange Rate (NEER), the Monetary Authority of Singapore (MAS) has successfully curbed imported inflation. In recent years, price inflation was largely due to domestic sources, in particular high wage growth. As Singapore is always facing labour shortages, together with the fact that workers are relatively high skilled, it is not possible to reduce the wage cost under normal circumstances. Wage growth in Singapore is highly dependent upon the recommendations of the National Wages Council (NWC), a tripartite body comprising of representatives from employers, employees and the government. The strong dollar policy and the high wage growth have eroded Singapore's export competitiveness. This paper highlights the importance of both MAS and NWC in affecting domestic inflation and export competitiveness, and derives the response functions for both organisations under optimal policy rules.