Exchange rate policy in Singapore: Prospects for a common currency peg in East Asia

In this paper, we review the exchange rate policy of Singapore and consider some issues in relation to the financial crisis in East Asia. We apply the theory of optimum currency area and find that pegging to a common currency would be difficult to maintain in East Asia as country-specific shocks are dominant in the determination of output in all countries. On the other hand, there is little evidence that greater exchange rate flexibility has been a stabilizing factor in Singapore financial markets. Given a growing need for a regional monetary arrangement to prevent contagious financial crises, the group of countries within ASEAN might be a good starting point for such an arrangement. Lack of strong theoretical or empirical support for a common currency peg suggests that the exchange rate policy for Singapore and East Asia may have to be pragmatic and flexibly adjusted to changing environments for the time being.