policies to resolve inflation

8/3/2019 Policies to Resolve Inflation

1/44

POLICIESTO

RESOLVE

INFLATION


2/44

1) WHATISINFLATION?

SUSTAINEDINCREASEINGENERALPRICELEVEL

2) CAUSESOF

INFLATION?

(The

CAUSE

is

IMPORTANT

sothatwecanCUREtheILLNESSwiththeRIGHTMEDICATION)

3) Causes

of

Inflation EXCESSIVERISEINAD(DEMANDPULLINFLATION)

INCREASEINCOP(COSTPUSHINFLATION)

RECALL


3/44

3) HARMFULEFFECTS

OF

INFLATION?

FallinSavings(Iasloanablefundfalls)

FallinInvestment&Production(realNY,

Employment) RedistributionofWealthandIncome(thatcreates

inequity)

InternalSocialDiscontentment(asaresultofthe

inequity) WorsensBOP

FallinExternalValueofCurrency

RECALL

InternalEffects

ExternalEffects


4/44

SinceitscausewasduetoEXCESSIVERISEINAD,

PolicyshouldAIMatREDUCING AD

Via.

POLICIESTORESOLVESDemandPull Inflation

GTAX

Contractionary

MonetaryPolicyContractionary

Fiscal Policy

i/rExchangeRatePolicy(Strengthen

Currency)


5/44

Sinceits

cause

was

due

to

RISE

in

COP,

PolicyshouldAIMatREDUCING COP

Via.

POLICIESTORESOLVESCostPush Inflation

Income

Policy(Wage)

Govt Subsidyon

Retraining

Workersto pdtv

Exchange

Rate

PolicySupply

Side

Policies

StrengthenCurrency

Govt grant

onR&D

Govt Provision

onInfrastructure

LRSupplySide

SR

Su

pply

Side


6/44

SinceitscausewasduetoEXCESSIVERISEINAD,

PolicyshouldAIMatREDUCING AD

Via.

POLICIESTORESOLVESDemandPull Inflation

GTAX

Contractionary

MonetaryPolicyContractionary

Fiscal Policy

i/rExchangeRatePolicy

(Strengthen

Currency)


7/44

HowdoesContractionary MonetaryPolicyvia

InterestRate

RESOLVESDemandPull Inflation?

i/rcostof

borrowing

Cofgoods&

svs oncredit

Purchaseofgds &

svs oncredit

moreex.


8/44

LoanCalculator

Howdoes

i/raffectC?

HONDAFIT(A)

C


9/44


InterestRate


costof

borrowing

Cofgoods&

svs oncredit

Purchaseofgds &

svs oncredit

moreex.

Higherreturns

onsavings(infinancialinstitutions)

Higheropp.cost

ofspending

savings

i/r

C

i/rcostof

borrowing

,cp

MEI

I

i/r


10/44


InterestRate


C I

AD


11/44


InterestRate


AD

RealNY

GPL

AD2AD1

AD3

P3

P2P1

AS1

Yf1

AD


12/44


InterestRate


RealNY

GPL

AD4AD3

P3

P4

AS1

Yf1

AD


13/44

NEWSONEXCHANGERATEPOLICYTOCURBINFLATION

CaseStudy:SingaporeusesExchange

RatePolicy

to

deal

with

both

demand

pull

andcostpushinflation


14/44

Singaporecouldfaceanotherroundofinflationiffirmsraisewages,9July2008 FinanceMinisterTharman Shanmugaratnam haswarnedthatSingaporecouldface

anotherround

of

inflation

if

companies

increase

wages

to

help

workers

cope

with

the

highercostoflivingtoday. HesaidthiswillalsoaffectSingapore'scompetitivenessandtheabilitytocreatejobs. HigherriceandoilpriceshaveledsomeSingaporeanstocallonthegovernmenttoset

thetonebyraisingwages. ButMrTharman saidsuchshorttermmeasuresarenotprudent.Instead,hesaidthe

governmenthasprovidedassistancetohelpSingaporeansdealwiththehighercostofliving.

MrTharman saidSingaporealsoaddressestheproblemofinflationmainlythroughitsexchangeratepolicy.Sincethebeginningoflastyear,theSingaporedollarhasappreciatedby11percentagainsttheUSdollar.

However,theministersaidthereisalimittohowmuchSingaporecanallowitsdollartorisetofightinflation.MrTharman saidifSingaporedramaticallystrengthensits

dollar

to

offset

the

higher

prices,

it

will

instead

hurt

economic

growth

badly. MrTharman saidthelastingsolutiontoinflationistocontinuewitheffortstohelp

workersupgradetheirskillsandearnbetterwages.

CaseStudy:HowdoesSingaporedealwith

Inflation?

FinanceMinister:

.ifSingaporedramatically strengthensitsdollar tooffsetthehigherprices,itwillinstead

hurteconomicgrowthbadly.

FinanceMinister:.lastingsolutiontoinflationisto

continuewitheffortstohelpworkers

upgradetheir

skills and

earn

better

wages.


15/44

CaseStudy:HowdoesSingaporedeal

withInflation?

DemandPullInflation CostPushInflation

ExchangeRatePolicy

SupplySidePolicy ExchangeRatePolicySR LR

Strengthen

Currency

IncomePolicy

(wages notallowedtorise

fasterthanrise

inlabourpdtv)

Govt subsidyonRetraining

Programmeto

pdtv oflabour

Strengthen

Currency

Govtgranton

R&D

Govt provision

orspendingonInfrastructure


16/44

ComparisonofTheoreticalPoliciesand

Policiesadopted

by

Singapore

to

curb

withInflationTheoreticalPoliciestoCurbInflation

DemandPullInflation CostPushInflation

Contractionary

FiscalPolicy

Contractionary

Monetary

Policy

SupplySidePolicy ExchangeRate

Policy

SR LR

G

InterestRate

Policy(i/r)

Income

Policy

(Wage)

Govt Subsidyon

Retraining

Programmeto

pdtv oflabour

ExchangeRate

Policy

(Strengthen

Currency)

Taax

ExchangeRate

Policy

(Strengthen

Currency) GovtGrantonR&D

GovtProvisionorSpendingon

Infrastructure

PoliciesSINGAPOREUsestoCurbInflation

DemandPull

Inflation CostPushInflation

ExchangeRate

Policy

SupplySidePolicy

ExchangeRate

PolicySR LR

ExchangeRate

Policy(Strengthen

Currency)

IncomePolicy

(wagesnotallowed

torisefasterthan

riseinlabourpdtv)

Govt Subsidyon

Retraining

Programmeto

pdtv oflabour

ExchangeRate

Policy

(Strengthen

Currency)

Govtgranton

R&D

Govt provisionorspendingon

Infrastructure


17/44

InSingapore,

tightening

monetary

policy

means

a

strongerSingdollar.Thismakesimportedgoods themainsourceofinflation cheaperbutcanhurt

exporters

by

making

exports

more

expensive

to

othercountries.

FinanceMinisterMrTharman Shanmugaratnam ,saidduringaconferencein2010thattighterfiscalpolicy

cuttinggovernment

spending

and

raising

taxes

shouldplayaroleindrainingexcessfundsfromthesystem.


Inflation?

tightening

monetary

policy

means

a

stronger

Singdollar.importedgoods themainsourceofinflation(costpushinflation) cheaperbut

hurtexportersexportsmoreexpensive

FinanceMinister:tighterfiscalpolicy cuttinggovernment

spendingand

raising

taxes

should

play

a

role

in

drainingexcessfundsfromthesystem.

InSingapore,Contractionary Fiscal

Policyis

not

used

in

timesofinflationarypressures


18/44

SmallsizeofG limitedroomforG

Contractionary FiscalPolicyvia Tmayhaveadverse

effectoninwardFDIandimmigrationofforeigntalents

WhyisContractionary FiscalPolicynotusedinSingapore

in

times

of

high

inflationary

pressures?


19/44


20/44

WhyisMonetaryPolicy

centered onInterestRate

(InterestRate

Policy) not

used

in

Singapore

intimesofhighinflationarypressures?

Instead,MonetaryPolicy

centered on

Exchange

Rate

(ExchangeRatePolicy) isUsed?


21/44

SingaporesPerspectiveonMonetaryPolicy

Characteristics of the Singapore economy

Small and open economy

Limited resources

Not able to use interest rates asan instrument tool

Due to Singapores openness,any attempt to manage the i/r

would lead to large capital

movements causing instability in

the Singapore dollar

Due to Singapore having a small

economy, it is a price taker in

international market for funds and

cannot influence i/r

Importance of exchange rates as atool

Being a resource poor country,Singapore is heavily dependent on

imported inputs. Hence a rise in

exchange rate can help curb cost

push inflation significantly

With export revenue comprising a

large proportion of Singapores AD, a

strong exchange rate can reduce the

competitiveness of our exports and

dampen inflationary pressures

MAS focuses on the use of Exchange Rate Policy tocontain inflation in Sin gapore


22/44

IntheSR,mainlyviaexchangeratepolicybyStrengtheningSGD(forbothdemandpullandcost

pushinflation)


Inflation?


23/44

SRmeasure:

Strengthen

Currency

(ExchangeRatePolicy)

SRSupply

Side

Policy

(IncomePolicy)


Cost

Push

Inflation?


24/44

SRmeasure:

Strengthen

Currency

(ExchangeRate

Policy)


Cost

Push

Inflation?


25/44

Exchange rate: Price in S$:

S$4

S$2

StrengthenCurrency(

Exchange

Rate)

Priceofimports (inlocalcurrency)

China-made

toy car(import)

Strengthen S$ Price of importin S$

S$1 = CNY5

S$1 = CNY10

CaseStudy:HowdoesStrengtheningSGD

curb

Cost

Push Inflation?


26/44

Lowers Cost of Living

Lowers Cost of Production

Reduces Price of

Imports (in localcurrency-SGD)

Reduces Price ofimported raw materials

and components (in local

currency-SGD)

Case

Study:

How

does

Strengthening

SGDcurbCostPush Inflation?


27/44

Increase in

SRAS


curb

Cost

Push Inflation?


28/44

StrengthenCurrency

(ExchangeRatePolicy)


Demand

Pull

Inflation?


29/44

S$1 = CNY5

Exchange rate:

S$1 = CNY10

Price in CNY:

CNY500

CNY1000

StrengthenCurrency(ExchangeRate)

Priceof

exports (in

foreign

currency)

Singapore-

made harddisk drive(export)

S$ Strengthen

Price of export in

Chinese Yuan/(Renminbi)

Case

Study:

How

does

Strengthening

SGDcurbDemandPull Inflation?


30/44

XStrengthenCurrency()

price ofexports (inforeign $)

price ofimports(in local $)

More thanproportionate Quantitydemanded ofexports

More thanproportionate Quantitydemanded ofimports

M

(X-M)Assumption (X): Demand for exports is price-elastic.

Assumption (M): Demand for imports is price-elastic.


curb

Demand

Pull Inflation?

ChinasReaction:

SingaporesReaction:


31/44

Ingeneral,aslongastheMarshallLernercondition

(i.e.Epx +Epm >1)holds,

StrengtheningofCurrency (XM)


curb

Demand

Pull Inflation?


32/44


curb

Demand

Pull Inflation?


33/44

Limitationsofexchangeratepolicyin

controlling

inflation

1.Demandforexportsandimportsmaybepriceinelastic

2.Conflict

with

other

macroeconomic

goals

3.Availabilityofreserves

4.Timelag

Pg 99100


34/44

SRmeasure:

SRSupply

Side

Policy

(IncomePolicy)


Cost

Push

Inflation?

Pg 49


35/44

SingaporealsoadoptsSRSupplySidePolicytoincreaseASsoastoreducecostpushinflation.

Income

Policy

keeps

labour costs

low,

lowering

overallCOP

Singaporegovernmentsetguidelinesonthewageincreasespermitted.

Thru

National

Wage

Council

where

wages

may

notbeallowedtorisefasterthanriseinlabourproductivity.


withCost

Push

Inflation?

SRSupplySidePolicy

(IncomePolicy)

Pg 49


36/44

Limitationsofincomepolicyin

controllinginflation

LimitedimpactasNationalWageCouncil(NWC)recommendationisjustaguideline.

Privatefirms

not

oblige

to

observe

it.

Hence,COPmightnotfallsignificantly.

Pg 102


37/44

Singaporecouldfaceanotherroundofinflationiffirmsraisewages,9July2008 FinanceMinisterTharman Shanmugaratnam haswarnedthatSingaporecouldface

anotherroundofinflationifcompaniesincreasewagestohelpworkerscopewiththehigher

cost

of

living

today.

HesaidthiswillalsoaffectSingapore'scompetitivenessandtheabilitytocreatejobs. HigherriceandoilpriceshaveledsomeSingaporeanstocallonthegovernmenttoset

thetonebyraisingwages. ButMrTharman saidsuchshorttermmeasuresarenotprudent.Instead,hesaidthe

governmenthasprovidedassistancetohelpSingaporeansdealwiththehighercostof

living. MrTharman saidSingaporealsoaddressestheproblemofinflationmainlythroughits

exchangeratepolicy.Sincethebeginningoflastyear,theSingaporedollarhasappreciatedby11percentagainsttheUSdollar.

However,theministersaidthereisalimittohowmuchSingaporecanallowitsdollartorisetofightinflation.MrTharman saidifSingaporedramaticallystrengthensitsdollartooffsetthehigherprices,itwillinsteadhurteconomicgrowthbadly.

MrTharman said

the

lasting

solution

to

inflation

is

to

continue

with

efforts

to

help

workersupgradetheirskillsandearnbetterwages.


withInflation?

FinanceMinister:

.ifSingaporedramatically strengthensitsdollar tooffsetthehigherprices,itwillinstead

hurteconomicgrowthbadly.

FinanceMinister:.lastingsolutiontoinflationisto

continuewitheffortstohelpworkers

upgrade

their

skills and

earn

better

wages.


38/44

LRmeasure:

LRSupplySidePolicy

(1) Govt Subsidyon

Retraining

Workers

to

RaiseProductivity

(2) Govt Grant

on

R&D(3) Govt SpendingonInfrastructure


withCost

Push

Inflation?


39/44

LRmeasure: LRSupplySidePolicy

(1) Govt SubsidyonRetrainingWorkerstoRaise

Productivity


withCost

Push

Inflation?

Produc

vity

Capacity(LRAS )

GPL(resolvingCostPush

Inflation)

AD

P1

GPL

RealNY

AS1

AS2

P2

Pg 56,103


40/44

LimitationsofRetrainingProgrammeto

resolvecost

push

inflation

ResistanceofWorkers

CostofFinancing

LongGestation

Period

Pg 103


41/44

LR

measure: LRSupplySidePolicy

2) Govt GrantonR&D


withCost

Push

Inflation?

AssumingR&Dhasfavourable outcome,AdvancementofTechnology

raisesProductive

Capacity

LRAS(shisright) GPL(resolvingCostPushInflation)

Pg 57


42/44

TaxoffsetstocovertrainingcostsStraits

Times

10

Feb

2011

Thousandsofworkershavebenefitedfromtraininginitiativessupportedbythe$2billionNationalProductivityFund

TheProductivity

and

Innovation

Credit

(PIC)

introduced

in

last

years

Budgetprovidesfirmswithtaxincentivesforinvestmentsinareassuchasautomation,researchanddevelopment,registrationandacquisitionofintellectualpropertyrightsandstafftraining.

ThePICisakeycomponentoftheGovernmentsefforttoexpandproductivityby2percentto3percentayearoverthenextdecade.

Inthenews:InterventionistSupply

SidePolicy


43/44

CostofFinancing

LongGestationPeriod

LimitationsofGovt GrantonR&Dto

resolvecost

push

inflation

Pg 59


44/44

TheEnd

policies to resolve inflation

Documents