THE MONEY SUPPLY IN SINGAPORE : EXOGENOUS OR ENDOGENOUS?

Abstract

The purpose of this study is to examine the exogeneity and endogeneity nature of the money supply in a small and open economy like Singapore. The different emphasis placed on the monetary policy by the Monetary Authority of Singapore (MAS) has set us apart from most of the western economies. According to the MAS, the right emphasis should be awarded to the real sector and thus 'monetary policy based on control of money supply has no place in Singapore' (Straits Times, 1 August 1982). In this sense, money is essentially endogenous in Singapore. However, it has been argued by some economists that the slowing down of the money supply growth in the mid-80s had inevitably lead to a recession. These critics purported that money supply is exogenous in Singapore and that it should be careful1y monitored. This study attempts to resolve the exogenous versus endogenous issue using the 1984-1993 data to ascertain the claim made by the MAS in 1982. The MAS's economic stand is based on the protection of domestic inflation through the management of the foreign exchange rate market. To this end, we specify a money growth equation for empirical analysis with inflation, exchange rate growth and GDP growth as explanatory variables. Using a multi-regression approach, it is found that M1 is the most endogenous with respect to income, exchange rate and inflation, while M2 is the most exogenous. Hence, the empirical results are in opposition to the MAS's claim that money supply is endogenous in Singapore. However, there is little evidence showing that a slower money supply growth rate would lead to an economic recession in Singapore.