24-04-2012, 04:17 PM
Firstly, everything is built on the premise of Impossible Trinity. It is because of this that since Singapore chooses free capital flow, it can only choose between exchange rate or interest rate policy. This is also the central argument of which if you choose not to believe in it, there’s no way we can continue debating about it.
Secondly, exchange rate policy can never control domestic demand, only fiscal and interest rate policies can do so. However, as trade is 3x the size of our GDP, it makes sense for us to choose exchange rate policy as we need to secure control of our exchange rate. No matter which direction our exchange rate goes, import and export will suffer different impacts.
Additionally, interest rate policies are inefficient in Singapore due to the various reasons I have mentioned. This is known as the multiplier effect. A 1% rise in interest rate can lead to maybe 2% drop in liquidity in other countries. As for Singapore, a 1% rise in interest rate may lead to only 0.4% drop in liquidity. Thus, to curb 5% of liquidity, Singapore has to raise interest rate to 12.5% where as other countries only need to rise by 2.5%. This is not forgetting that if interest rate goes sky high, business and investment will suffer as projects need to have higher rate of return to justify its commencement.
As for corydous, the government does not need to spend the money from bond. We already have budget surplus year after year, which means the government collects more taxes than they spend. This extra money is what that is funding our growing reserves year after year for GIC and Temasek to invest. And if you spend all your bond money now, how is the government to pay for the interest rate when the time comes?
As for your 2nd question, retailers like us will flock for the banks for the interest rate but investment dollars including the hot currencies will flock for the bond market. Hot currencies are known for their ability to transfer funds to another market for a change in interest rate. They take advantage of the government bond interest rate and not the lower bank interest rate.
Anyway, this will be my last post for this topic, I feel too tired to continue.
Secondly, exchange rate policy can never control domestic demand, only fiscal and interest rate policies can do so. However, as trade is 3x the size of our GDP, it makes sense for us to choose exchange rate policy as we need to secure control of our exchange rate. No matter which direction our exchange rate goes, import and export will suffer different impacts.
Additionally, interest rate policies are inefficient in Singapore due to the various reasons I have mentioned. This is known as the multiplier effect. A 1% rise in interest rate can lead to maybe 2% drop in liquidity in other countries. As for Singapore, a 1% rise in interest rate may lead to only 0.4% drop in liquidity. Thus, to curb 5% of liquidity, Singapore has to raise interest rate to 12.5% where as other countries only need to rise by 2.5%. This is not forgetting that if interest rate goes sky high, business and investment will suffer as projects need to have higher rate of return to justify its commencement.
As for corydous, the government does not need to spend the money from bond. We already have budget surplus year after year, which means the government collects more taxes than they spend. This extra money is what that is funding our growing reserves year after year for GIC and Temasek to invest. And if you spend all your bond money now, how is the government to pay for the interest rate when the time comes?
As for your 2nd question, retailers like us will flock for the banks for the interest rate but investment dollars including the hot currencies will flock for the bond market. Hot currencies are known for their ability to transfer funds to another market for a change in interest rate. They take advantage of the government bond interest rate and not the lower bank interest rate.
Anyway, this will be my last post for this topic, I feel too tired to continue.