MONEY AND ECONOMIC ACTIVITY IN SINGAPORE

Abstract

There are many literatures covering the monetary environment of Singapore. The general consensus of these literatures suggest an endogenized money supply condition in the Republic's economy - a Keynesianism model of economy. However, substantive statistical study is done only by Lee and Li on the aspect of money-income causal relationship. In their study, a bidirectional causality is found but the statistical result also showed a "money leads income" phenomenon. Though they rounded up by proposing that Singapore is still close to the UK model on the ground of their closeness in economic characteristics, the validity of such assertion is doubtful given that their "money leads income" finding is more suggestive of a US type of causal model. In fact, according to Lee and Li’s statistical results, the claim by previous literatures about the endogeneity of money supply in Singapore would waiver. The objective of this paper is to determine the relationship between money and economic activity (proxied by income) in Singapore. This is done mainly via conducting regression tests on the nature and direction of causality between money and income. The importance of this paper, and hence its contribution, stems from the review of related literature, the formulation of analytical framework, testing of the money-income relationship, and the empirical results. Prior to testing, a brief discussion will be done in chapter I and II on the Keynesian’s versus Monetarist's views on the role of money and the Singapore economic environment, respectively. On chapter III, the concept of causality and the methodology for testing causality is discussed. Chapter IV presents the results of the test and chapter V provides summary and conclusion. The time constraint has limited the study to focus essentially on the money-income lead-lag relationship. Price-money relationship was not tested.