Capital Flows and Exchange Rate Volatility: Singapore's Experience
NBER Working Paper No. 11369
Singapore’s experience with international capital flows over the past two decades or so has been a rather – although not completely – benign one, owing to strong fundamentals and generally well-conceived macro-economic policies. We begin by briefly discussing the experience in 1998 of Hong Kong, another city-state with a well-developed banking system and equities market, and operating on a Currency Board (CB) system (although with some differences from Singapore’s CB system). The discussion serves to identify some ‘areas of vulnerability’ in the Hong Kong set-up at that time. We next discuss Singapore’s policy background and early experience, and in the light of Hong Kong’s experience are better able to appreciate how Singapore’s policy framework served to circumvent or minimize important vulnerabilities. Particular attention is paid to Singapore’s exchange-rate policy and its policy of non-internationalization of the Singapore dollar. Equity- and currency- market interactions are also considered. We next show how Singapore emerged relatively unscathed from the 1997 Asian Crisis. Lastly, we discuss Singapore’s debt markets, and show how under the imperative of promoting the development of its bond markets the non-internationalization policy has been progressively relaxed, while retaining key safeguards.