The Global Financial crisis
In August 2007 at the center of world economy, United States of America, the global financial crisis have begun. It started with credit crunch and liquidity crisis, when “the US sub-prime mortgage defaults began to rise and foreclosures increased.” (Sharma 2013, p.3) Year after the crisis had deepened since a big number of international markets depend on US economy. So, Global financial crisis corresponds for the largest decline in the world economy in our days. (McKibbin and Stoeckel 2009)
Consistently, crisis triggered country by country, advanced economies as well as developing have not escaped from the instability in financial systems and business cycles, ...view middle of the document...
Therefore, since USA was in the list of major trading partners of Singapore, country’s economy was affected significantly by the American crisis. So, it can be concluded that large amount of the impact of crisis was due to trade volatility.
Figure 2: Singapore’s merchandise trade and GDP in nominal terms, 2003-2012 (Lim 2013)
Figure 3: Trade with Major Trading Partners (Government of Singapore 2013)
Monetary policy response
In order to return economy to its stable path Singapore’s government have implemented different policies, such as fiscal policy, banking and financial sectors’ programs, and monetary policy. The uniqueness of monetary policy in Singapore is that the key instrument of monetary system is Net Effective Exchange Rate (NEER). So, by changing NEER the government can stimulate economy. To be precise, during economic recessions and crisis NEER is lowered by Monetary Authority of Singapore (MAS), conversely, during the period of prosperity and high growth, NEER is increased. Therefore, during the global financial crisis it was expected that NEER would be lowered by Singapore’s government.
The first step of Monetary Authority of Singapore was taken in April 2008. At that time the effects of Global Financial crisis had not yet reached Singapore’s economy (ASEAN 2013). Despite the coming crisis, MAS decided to continue its previous path of gradual appreciation of the national currency. In figure 4 it can be seen that in April 2008 NEER was re-centered, so its index was returned to 100. So, MAS was confident in Singapore’s dollar and did not allow it to depreciate.
Figure 4: NEER changes in 2008-2010 (Monetary Authority of Singapore 2010)
The next monetary policy statement in October 2008 announced the shifting of NEER to neutral bias (Sharma 2013). In other words, MAS suspended currency appreciation path in the context of the crisis, NEER was appreciated at zero rates. At the end of 2008, these measures helped “to soften the blow and instill confidence among local exporters” (Sharma 2013). However, according to ASEAN report (Country report of the ASEAN Assessment on the Social Impact of the Global Financial Crisis: Singapore 2013, 1), in 2009 when crisis was sharpened, additional measures were needed to be considered. Thus, in April 2009 MAS change the proportion of Singapore’s dollar in the basket...