Mr Lee 2012

Macro Policies
Fiscal, Monetary and Exchange rates Policies
How it works Conditions Limitations Applications
FP Demand side (AD):

G => AD => AD
via k => NY, output
and N

Tax => C,I =>
AD via k => NY,
output and N

Demand side (AD)
with AS impacts:

Building basic
infrastructures =>
increase capacity
and productivity =>
increase AS in LR

Supply side (AS):

Subsidies, tax
rebates






Effectiveness
depend on:
the size of k;
time lag

Crowding out
effects:

Borrow from
domestic banks i/r
=> I and C will

Compete for limited
FOPs => COP => I
will

Finance through
taxation => Yd and
retained earnings
will => C and I
will
However, the tax
multiplier if 1

Conflicts with other
objectives:

Demand pull
inflation if
expansionary FP
during healthy
economic growth
condition; however
if reduce G may
conflict with social
objectives and
affect LT growth
potential;

Impacts on
employment:
Expansionary FP
may have limited
impact on solving
unN problem, as
G mainly creates
jobs in the
construction
industry, whereas
the job lost couls be
due to falling X and
I;
Recent
expansionary
policies in USA and
Singapore;

USA massive US$
800 billion budget
deficit in 2009;

Spore S$20.2
billion resilience
package in 2009;
(see Annex A for
details)
Mr Lee 2012


MP






Central bank Ms =>
i/r => I and C =>
AD via k => NY,
output and N

Central bank has the
ability to control Ms
and interest rates;

I and C responsive to
in interest rate
I and C might not
response to i/r:

During recession,
lowering i/r might
not be able to
stimulate
investment and
consumption as the
general business
and economic
outlooks are bleaks;
uncertainties in the
economy will
discourage more I
and C; (e.g. Japan in
1990s)

During overheating,
higher i/r and cost
of borrowing might
not discourage
investors and
households in their
spending; (e.g.
China in 2007)


In developed
countries, in i/r
serves as a signal
to the
financial/stock
markets of the
governments
intention; The
financial/stock will
react and affect
the wealth of the
households thus
impacts on the C
and I;

Central banks
usually choose to
control i/r directly
rather than
through changes in
Ms;
Exchange
rate
policy
Manipulate the
exchange rates =>
Px and Pm => (X-
M) => AD via k =>
NY, output and N

ML conditions:

PEDx + PEDm < 1
If PEDx, PEDm <1,
may worsen the
BOT with
depreciation of
currency;

Falling (X-M) may
not be due to high
Px and low Pm;

Lower value of
currency will lead to
imported inflation
(especially for
countries rely
heavily on imports);

Lower value of
currency may lead
to ST K-outflow and
loss of confidence;
For Singapore, the
policy stance is to
have a strong and
stable currency;
particularly with
rising world prices,
MAS maintains a
steady
appreciation of S$;

(See Annex B)