Application of the IS MP IA model to the Singapore economy and policy implications. Abstract

Transcription

1 Application of th IS MP IA modl to th Singapor conomy and policy implications Yu Hsing Southastrn Louisiana Univrsity Abstract Extnding th IS MP IA modl (omr, 2000, w find that quilibrium output in Singapor is ngativly affctd by th xpctd inflation rat and th world intrst rat and positivly influncd by ral apprciation, stock markt prformanc, and world output. Equilibrium GDP would ris by 0.872% if th ral ffctiv xchang rat riss by 1%. Th cofficint of ral govrnmnt dficit spnding is found to b insignificant, suggsting that pursuing fiscal disciplin and budgt surpluss in th long run by th Singapor govrnmnt is appropriat. Citation: Hsing, Yu, (2005 "Application of th IS MP IA modl to th Singapor conomy and policy implications." Economics Bulltin, Vol. 15, No. 6 pp. 1 9 Submittd: Octobr 13, Accptd: Fbruary 3, UL: 04O10013A.pdf

2 1. Introduction In many aspcts, Singapor s conomic prformanc is bttr than most of othr countris in th rgion. Although th conomy suffrd a ngativ growth rat of 1.90% in 2001 du to th worldwid rcssion, it bouncd back and grw at an annual rat of 2.15% in 2002 and 1.09% in Th cntral govrnmnt pursud a consrvativ fiscal policy as thr wr no budgt dficits sinc 1988 xcpt for small amounts of dficits in 2001 and 2002 mainly du to th worldwid conomic slowdown. Th conomic rcovry ld to a budgt surplus of billion in Th 3-month intrbank rat rachd 0.74% in 2003 compard with th U.S. fdral funds rat of 1.13% and Euro rat of 1.22%. It may suggst that th Montary Authority of Singapor (MAS closly followd world intrst rats in dtrmining th domstic intrst rat policy in ordr to continu attracting forign invstors and mak th cost of borrowing affordabl. Its inflation rat has rmaind rlativly low and lss than 2.0% sinc Th inflation rats of -0.40% in 2002 and 0.51% in 2003 suggst that montary policy in maintaining pric stability has bn ffctiv. Lik most othr countris in th rgion, th Singapor dollar dprciatd during th Asian financial crisis from 1.40 in 1996 to 1.68 in 1997 and has bn rlativly stabl sinc thn. Stock markt prformanc followd intrnational movmnts, raching a high of (1995 = 100 in 2000 and dclining to or 27.02% in Th dcras in stock valus is xpctd to affct houshold consumption spnding and businss invstmnts (Mishkin, 1995; Kuttnr and Mossr, On ara of potntial concrn is its rlativly high domstic dbt/gdp ratio of % in 2003 compard with a rcnt low of 69.97% in Th dbt srvic could affct othr govrnmnt srvics ngativly. Svral rcnt studis xamind Singapor s short-run output fluctuations and/or dmand and supply shocks (Bhattacharya, 1997; Alba and Papll, 1998; Mng, 1999, montary or fiscal policy (Alba and Papll, 1998; ; Nadal-D Simon, 2000;Yip, 2003, th xchang rat (Chinn, 2000; Chou and Chao, 2001; Toh and To, 2001; ilson and Tat, 2001; u, 2001; Fujii, 2002; Yip, 2003, th stock markt (ongbangpo and Sharma, 2002; u, 2001, Fng, 2002, and th world intrst rat (Bornsztin, Zttlmyr, and Philippon, This papr attmpts to apply th IS-MP-IA modl (omr, 2000 to xamin th rlationships btwn ral output in Singapor and svral major macroconomic variabls and has svral diffrnt faturs. First, to th author s knowldg, fw of th prvious studis mployd th IS-MP-IA modl in spcifying th rlationships among th variabls. Scond, th IS-MP-IA modl (omr, 2000 is xtndd to includ stock markt prformanc, th ral xchang rat, and world output. In rspons to bttr stock markt prformanc, consumption and invstmnt xpnditurs ar xpctd to incras du to th walth ffct, Tobin s q thory, and th balanc-sht channl (Mishkin, 1995; Kuttnr and Mossr, Third, th montary policy function is xtndd to includ th xchang rat and th world intrst rat. It would b rasonabl to postulat that a small opn conomy would us montary policy to maintain currncy stability and follow th world trnd so that th lvl of domstic intrst rats would b comparabl to th world lvl. 2. Thortical Modl Suppos that th consumption function is dtrmind by disposabl incom, th ral intrst rat and financial stock valus, that invstmnt spnding is a function of th ral intrst rat and 1

3 stock valus, that nt xports ar a function of th ral ffctiv xchang rat and world output, and that th montary policy function is influncd by th inflation gap, th output gap, th xchang rat gap, and th world intrst rat. Extnding th IS-MP-IA modl (omr, 2000, w can writ th IS, MP (montary policy, and IA (inflation adjustmnt functions as whr Y = C( Y T,, S (, S + G + NX[ ( P * / P, Y ] (1 = ( π π*, Y Y*, *, (2 π = π + θ ( Y Y* + λ (3 Y = ral GDP for Singapor, C = th consumption function, T = govrnmnt tax rvnus, = th ral intrst rat, S = shar stock indx, I = th invstmnt function, G = govrnmnt spnding, NX = nt xports, = th nominal ffctiv xchang rat (an incras is an apprciation, P* = th pric lvl in Singapor, P = th pric lvl in slctd countris, Y = world output, π = th inflation rat, π * = th targt inflation rat, Y* = potntial output, * = th targt xchang rat, = th world intrst rat, and π = th xpctd inflation rat. Suppos that a highr ral intrst rat would rduc houshold consumption spnding, that currncy apprciation hurts nxt xports, that mor world output would hlp nt xports, and that th Montary Authority of Singapor would ract positivly to a highr inflation rat, mor output and th world intrst rat and ngativly to xchang rat apprciation. Assum that (1, (2 and (3 hav continuous partial drivativs. Lt C Y π > 0, C > 0, Y < 0, C > 0, S > 0, I < 0, < 0, I S > 0, π > 0, NX Y < 0, NX > 0, π < 0. Y > 0, (4 Th ndognous-variabl Jacobian is givn by J = Y π Y ( 1 C θ ( C ( C > 0. (5 2

4 Applying th implicit-function thorm and solving for thr unknowns Y,, andπ, quilibrium output Y is givn by Y = Y[ π, G, T, ( P * / P, S,, Y; θ, λ, π*, Y*, *] (6 Applying comparativ static-analysis, th impact of a chang in th nominal ffctiv xchang rat on quilibrium output is givn by Y NX = ( > 0if NX < 0if NX ( P*/ P + λ π ( C J ( P*/ P < λ ( P*/ P > λ π π ( C ( C + ( C + ( C + ( C (7 Hnc, th apprciation of th Singapor dollar would rais (rduc output if th positiv impact of incrasd consumption and invstmnt spnding causd by a dcrasd intrst rat is gratr (lss than th ngativ ffct of dcrasd nt xports. Bahmani-Oskoo and Mitza (2003 rviwd many prvious articls and indicatd that th influnc of currncy dvaluation on output is unclar, dpnding upon th spcification of a modl, th country undr study, th tim priod, th mthodology mployd in mpirical work, and othr factors. Th impact of a chang in stock prics or th world intrst rat on quilibrium output is givn by (8 and (9, rspctivly Y ( S ( C = S J S > 0 (8 Y ( = ( C J < 0 (9 An incras in th stock pric is xpctd to rais quilibrium output bcaus houshold consumption and businss invstmnt xpnditurs would incras du to th walth ffct, Tobin s q thory, and th balanc-sht channl (Mishkin, 1995; Kuttnr and Mossr, hn th world intrst rat riss, th cntral bank is likly to rspond in a similar mannr in ordr to follow th trnd. To avoid a high dgr of multicollinarity, govrnmnt dficit spnding dfind as D = G T is usd in mpirical work. Th sign of budgt dficits may b positiv sinc it would shift aggrgat dmand upward, uncrtain or tmporary (amsy and Shapiro, 1998; Blanchard and Protti, 1999; Taylor, 2000; Burnsid, Eichnbaum and Fishr, 2000, or nutral in th long run du to th icardian-quivalnc hypothsis (Barro,

5 3. Empirical sults Th sampl rangs from 1986.Q2 to 2003.Q2. al GDP is an indx numbr with 1995 as th bas yar. Numrical valus for ral GDP at th 1995 pric ar not usd bcaus th sris bgan in 2000.Q4. Th xpctd inflation rat π is th wightd avrag inflation rat of past four quartrs (Davidson and MacKinnon, al govrnmnt dficit is xprssd in billions. Th ral ffctiv xchang rat ε is qual to wightd forign currncis pr Singapor dollar adjustd for rlativ prics. Hnc, an incras inε is a ral apprciation, and vic vrsa. Th world intrst rat is rprsntd by th U.S. fdral funds rat du to its significant impacts worldwid. orld industrial output for industrializd countris is chosn to rprsnt world output. Variabls ar masurd in th logarithmic scal xcpt for th xpctd inflation rat and ral dficit spnding du to ngativ valus. Unit roots ar tstd first. Basd on th ADF tst, π is stationary in lvls at th 5% lvl, Y, D, ε, S, and Y hav unit roots in lvls at th 5% lvl, and all th variabls ar stationary in first diffrnc at th 1% lvl. Applying th Johansn tst, th valu of th trac statistic is compard with th critical valu of at th 1% lvl. Thus, th null hypothsis of a zro cointgrating rlationship can b rjctd. Hnc, ths variabls hav a long-trm stabl rlationship. To xamin th short-run dynamics, th rror-corrction modl (ECM with a lag lngth of 3 is stimatd and prsntd in Tabl 1. Th rsults show that th cofficint for th rror-corrction trm is significant at th 5% lvl. Th stimatd rgrssion and rlatd statistics ar prsntd in Tabl 2. All th cofficints in th rgrssion ar significant at th 1% lvl xcpt for that of ral govrnmnt dficit spnding, which is insignificant at th 10% lvl. Equilibrium output is ngativly influncd by th xpctd inflation rat and th U.S. fdral funds rat and positivly affctd by ral xchang rat apprciation, stock prics, and world output. Equilibrium output in logarithm would dclin by if th xpctd inflation rat riss by on prcntag point. If th ral ffctiv xchang rat riss by 1%, ral GDP would incras by 0.872%. An incras in world output by 1% is xpctd to rais Singapor output by 2.0%. Svral commnts can b mad. Th insignificant cofficint for govrnmnt dficit spnding suggsts that Singapor s consrvativ fiscal policy to maintain budgt surpluss in th long run is appropriat. Th positiv cofficint of stock prics indicats that whn stock prics incras, housholds would spnd mor du to th walth ffct and that firms would invstmnt mor du to Tobin s q thory or th Balanc-sht channl. Bcaus ral xchang rat apprciation would hlp rais output, th convntional approach to dvalu a currncy to stimulat th conomy would not apply to Singapor. Th Montary Authority of Singapor would b rational to chang th domstic intrst rat in rspons to th world intrst rat in ordr to kp intrnational invstmnts from flowing out of Singapor. Th currnt rlativly low intrst rat, which was initiatd by th Fdral srv Bank in th U.S., is xpctd to stimulat consumption and invstmnt spnding in Singapor. Lastly, th Singapor conomy will b hlpd by a strongr world conomy sinc its intrnational trad plays a major rol in its conomic growth. 4

6 4. Summary and Conclusions In this papr, th author has applid IS-MP-IA modl (omr, 2000 to xamin th impacts of changs in slctd macroconomic variabls on ral output for Singapor. Empirical outcoms suggst that th IS-MP-IA modl sms to work wll. A lowr xpctd inflation rat, a highr ral ffctiv xchang rat, a highr stock pric, a lowr world intrst rat, and mor world output ar xpctd to incras quilibrium output for Singapor. Thr ar svral policy implications. Th Montary Authority of Singapor plays a significant rol in dtrmining th dirctions and magnitud of output fluctuations whn th conomy rsponds to a chang in any of th right-hand sid variabls. Th world intrst rat and world output ar xtrnal forcs that ar byond Singapor s control. Mor world output or a lowr world intrst rat lading to a lowr domstic intrst rat would hlp th Singapor conomy bcaus thy would stimulat houshold consumption, businss invstmnt xpnditurs, and nt xports. Th potntial impact of ral dprciation on an conomy is mor complicatd than som would xpct. Th positiv ffct of ral apprciation on th Singapor output may b attributabl to th bnfits of lowr import prics, lowr domstic inflation, inflows of capital and othr factors. Bcaus stock markt prformanc would affct quilibrium output positivly, it would b appropriat for th Singapor govrnmnt to maintain a halthy stock markt, rduc irrgularitis, and ncourag intrnational fund managrs to invst in Singapor. 5

7 frncs Alba, J. D. and D. H. Papll (1998 Exchang at Dtrmination and Inflation in Southast Asian Countris Journal of Dvlopmnt Economics 55, Bahmani-Oskoo, M., and I. Mitza (2003 Ar Dvaluations Expansionary or Contractionary? A Survy Articl Economic Issus 8, Barro,. J. (1989 Th icardian Approach to Budgt Dficits Journal of Economic Prspctivs 3, Bhattacharya,. (1997 Sourcs of Fluctuations in Output: Evidnc from Small, Opn Economis of Asia Journal of th Asia Pacific Economy 2, Blanchard, O. and. Protti (1999 An Empirical Charactrization of th Dynamic Effcts of Changs in Govrnmnt Spnding on Output NBE orking Papr Numbr Bornsztin, E., J. Zttlmyr, and T. Philippon (2001 Montary Indpndnc in Emrging Markts: Dos th Exchang at gim Mak a diffrnc IMF orking Papr: P/01/01. Burnsid, C., M. Eichnbaum, and J. D. M. Fishr (2000 Assssing th Effcts of Fiscal Shocks. NBE orking Papr Numbr Chinn, M. D. (2000 Bfor th Fall: r East Asian Currncis Ovrvalud Emrging Markts viw 1, Chou,. L. and C.-C. Chao (2001 Ar Currncy Dvaluations Effctiv? A Panl Unit oot Tst Economics Lttrs 72, Davidson,. and J. G. MacKinnon (1985 Tsting Linar and Log-Linar grssions against Box-Cox Altrnativs Canadian Journal of Economics 18, Edwards, S. (1986 Ar Dvaluations Contractionary viw of Economics and Statistics 68, Fang,. S. (2002 Th Effcts of Currncy Dprciation on Stock turns: Evidnc from fiv East Asian Economis Applid Economics Lttrs 9, Fujii, E. (2002 Exchang at and Pric Adjustmnts in th Aftrmath of th Asian Crisis Intrnational Journal of Financ and Economics 7, Kim, Y. and H. K. Chow (2000 Exchang at policy in Singapor: Prospcts for a Common Currncy Pg in East Asia Singapor Economic viw 45, Kuttnr, K. N. and P. C. Mossr (2002 Th Montary Transmission Mchanism: Som Answrs and Furthr Qustions FBNY Economic Policy viw 8,

8 Mng, C. K. (1999 Sourcs of Macroconomic Fluctuations in Singapor: Evidnc from a Structural VA Modl Singapor Economic viw 44, Mishkin, F. S. (1995 Symposium on th Montary Transmission Mchanism Journal of Economic Prspctivs 9, Nadal-D Simon, F. (2000 Montary and Fiscal Policy Intraction in a Small Opn Economy: Th Cas of Singapor Asian Economic Journal 14, amsy, V. and M. Shapiro (1998 Costly Capital allocation and th Effcts of Govrnmnt Spnding Carngi ochstr Confrnc Sris on Public Policy 48, omr, D. (2000 Kynsian Macroconomics without th LM Curv Journal of Economic Prspctivs 14, Taylor, J. B. (2000 assssing Discrtionary Fiscal Policy Journal of Economic Prspctivs 14, Toh, M.-H. and H.-J. Ho (2001 Exchang at Pass-Through for Slctd Asian Economis Singapor Economic viw 46, ilson, P. and K. C. Tat (2001 Exchang ats and th Trad Balanc: Th Cas of Singapor 1970 to 1996 Journal of Asian Economics 12, ongbangpo, P. and S. C. Sharma (2002 Stock Markt and Macroconomic Fundamntal Dynamic Intractions: ASEAN-5 Countris Journal of Asian Economics 13, u, Y. (2001 Exchang ats, Stock Prics, and Mony Markts: Evidnc from Singapor Journal of Asian Economics 12, Yip, P. S. L. (2003 A -Statmnt of Singapor s Exchang at and Montary Policis Singapor Economic viw 48,

9 Tabl 1. Estimatd Error-Corrction Modl: 1987.Q Q2 d(y (-1 d(y (-2 d(y (-3 d( π (-1 d( π (-2 d( π ( ( ( ( ( ( ([ d(d(-1 d(d(-2 d(d(-3 d(ε (-1 d(ε (-2 d(ε ( ( ( ( ( ( ( d(s(-1 d(s(-2 d(s(-3 Y INT ( ( ( ( ( ( EC ( Adj F-statistic Log liklihood Akaik AIC Schwarz SC EC: th rror-corrction trm. INT: th constant trm. 8

10 Tabl 2. Estimatd grssion of Equilibrium GDP for Singapor: 1986.Q Q2 Dpndnt Variabl: LOG(Y Mthod: Last Squars Sampl(adjustd: 1986:2 2003:2 Includd obsrvations: 69 aftr adjusting ndpoints hit Htroskdasticity-Consistnt Standard Errors & Covarianc Variabl Cofficint Std. Error t-statistic Prob. C π D LOG(ε LOG(S LOG( LOG(Y squard Man dpndnt variabl Adjustd -squard S.D. dpndnt variabl S.E. of rgrssion Akaik info critrion Sum squard rsiduals Schwarz critrion Log liklihood F-statistic Durbin-atson stat Prob (F-statistic Y is quilibrium ral GDP. π is th wightd inflation rat of past four quartrs. D is ral govrnmnt dficit spnding. ε is ral ffctiv xchang rat. An incras is ral apprciation. S is stock pric indx. is th U.S. fdral funds rat. Y is world output. 9