Exchange rates and domestic prices in Singapore: An empirical study

Abstract

This paper evaluates the relationship between exchange rates and domestic prices in Singapore, and seeks to draw some policy implications for the achievement of price stability, should exchange rate volatility increase during the process of further capital market opening and foreign exchange liberalisation. The results indicate that the exchange rate has uni-directional causation to domestic prices, and depreciation of the domestic currency may result in domestic inflation. Exchange rate changes affect domestic prices through changes in the costs of production due to price changes in imported intermediate goods, rather than through price changes in imported consumer goods. This implies that depreciation may cause inflation. It is better to maintain and improve the competitiveness of exports through technical development and upgrading of product quality, rather than by engineering depreciation.