Impacts of Macroeconomic Policies and Financial Market Performance on Output in Singapore: A VAR Approach

Applying the VAR model and using the Treasury bill rate as a monetary policy tool, we find that in the long run, output for Singapore responds positively to a shock to lagged own output and negatively to an innovation to the Treasury bill rate, government debt as a percent of GDP, appreciation of the Singapore dollar, stock prices, inflation rates, or world oil prices. The government debt ratio is the most important variable in explaining output variance. When real M2 is considered as a monetary variable, similar patterns are found except that output responds negatively to a shock to world oil prices. Because the magnitude of output response to a shock to some of these variables varies widely, the Singapore government needs to be cautious in pursuing monetary, fiscal, and exchange rate policies. The relatively stable exchange rate that has been maintained in recent times is appropriate because a depreciation of the Singapore dollar would be contractionary in the first two quarters and its long-term impacts may not be predicted as accurately as some would expect.