MANAGING EXCHANGE RATE VOLATILITY: A COMPARATIVE COUNTERFACTUAL ANALYSIS OF SINGAPORE, 1994–2003

This paper looks at how Singapore's exchange rate regime has coped with exchange rate volatility, by comparing the performance of Singapore's actual regime in minimizing the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US dollar with some counterfactual regimes and the corresponding performance of eight other East Asian countries. In contrast to previous counterfactual exercises, we apply a more disaggregated methodology for the trade weights, a larger number of trade partners and ARCH/GARCH techniques to capture the time-varying characteristics of volatility. Our findings confirm that Singapore's managed floating exchange rate system has delivered relatively low currency volatility. Although there are gains in volatility reduction for all countries in the sample from the adoption of either a unilateral or a common basket peg, particularly post-Asian crisis, these gains are relatively low for Singapore, largely because of low actual volatility. There are additional gains for non-dollar peggers from stabilizing intra-east Asian exchange rates against the dollar if they were to adopt a basket peg, especially post-crisis, but the gains for Singapore are again relatively modest. Finally, the conclusion from previous counterfactual studies that there is little difference between a unilateral basket peg and a common basket peg in terms of stability reduction is confirmed.