Question

Appraise the adjustable peg, crawling peg and managed floating exchange rate systems and elaborate how the Monetary Authority of Singapore (MAS) conducts its monetary-exchange rate policy (a diagram is useful).

Answer 1

Solution:-

Given that

- Crawling pegs for the exchange rate usually against a single currency, such as the US dollar—were common in the 1980s in Latin America, particularly Brazil, during the high inflation periods. To prevent a run on the US dollar reserves, the exchange rate was adjusted frequently (weekly or daily) to keep pace with the inflation rate. Such a system was called a passive crawl.

- An adaptation used in Argentina, Chile, and Uruguay was the active crawl: The exchange rate was pre- announced for the coming weeks with changes taking place in small steps. The aim of the active crawl was to manipulate expectations of inflation. Because the domestic prices of many goods were directly tied to import prices, announced changes in the exchange rate would effectively signal future changes in the inflation rate of these goods.

- Independently managed floating rates- In this case, the exchange rate is left to market determination and the monetary authority is able to exercise independent monetary policy aimed at achieving such objectives as price stability and full employment. The central bank also has latitude to act as a lender of last resort to troubled financial institutions, if necessary

- It should be clear that the concepts of float, managed float, crawl, and target zone are not hard and fast rules. Central banks do occasionally engage, implicitly or explicitly, in regime switches—even in countries nominally following an independently floating exchange rate regime

- In contrast to most different nations, Singapore has embraced the utilization of the exchange rate instead of the interest rate as the instrument of financial approach. The decision of the exchange rate is predicated on the Singapore economy's little size and its serious extent of receptiveness to exchange and capital streams.

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