JC Economics Essay Series #99 – Zero Rate Appreciation & Global Financial Crisis

JC economic Essay Zero Rate Appreciation & Global Financial Crisis Model Answers 

During the 2009 global financial crisis and even the COVID-19 health and economic crisis, the de-facto central bank of S’pore, the Monetary Authority of Singapore (MAS), chose to Singapore dollar’s rate of appreciation remains at 0%. This is also termed as zero-rate appreciation of the S$. Typically, MAS keeps Singdollar at zero rate of appreciation amid weak global sentiments.

(See more of zero-rate appreciation here, and here.)


MAS eases Singdollar policy in measured move as economy braces for COVID-induced recession.
Straits Times, March 2020

Assess whether the above policy might be the most appropriate in managing the most harmful effects of the recent global economic crisis in Singapore. [25]


Global Economic Crisis & Harmful Effects to SG Economy


First explain and justify the most harmful effects of the 2020 global economic or 2009 financial crisis to Singapore.

1.Worsening of BOP
(due to nature of Singapore’s economy → small and open -> reliance on trade for survival)

Worsening current account- trade account (X&M): recessionary impact on trading partners  ⇒ erosion of wealth, loan default rate rises → freezing of the credit market, → fall in loans approval to firms and individuals, → fall in business transactions ⇒ lower demand export of services, eg tourism.


2. Higher unemployment
Poor business outlook and economic climate → delay of investment decisions → Fall in L-T and S-T capital (FDI) into SG economy. Continued worsening of the BOP from poor trade performance could lead to negative effects on 2 other goals of high and sustainable economic growth and cyclical unemployment

→i.e Fall In I, → fall in AD, → fall in actual economic growth → Increase in cyclical unemployment.

Fall in demand for business transactions coupled with losses from investments → fall in net profits of banks and financial institutions → workers laid off to trim costs amid the global economic or financial crisis

Eg: Retrenchments in Singapore more than double to 8,130 in Q2 2020;  DBS retrench 900 jobs in November 2008

Similar scenario in the exporting sector with fall in demand non-oil exports such as manufacturing sector, tourism and wholesale trade

3. Lower or Negative Economic Growth
Fall in income level as many suffers cut in wages or become unemployed → fall in purchasing power → fall in material standard of living. Note: This worsens income inequity as many of the unemployed belongs to the lower income group

Fall in income → fall in C → fall in AD →worsens the fall in actual economic growth



Question requires at least policies to manage these most harmful effects and evaluate the appropriateness of the policies, with exchange rate policy as a compulsory one for discussion. Students are required to conclude with a judgement on the most appropriate policies in managing the harmful effects of the recent global economic or financial crisis in Singapore with the following consideration:


Thesis: Yes, the above policy of zero appreciation of the Singapore dollars is the most appropriate in managing the most harmful effects of the recent global economic crisis in Singapore.

Explain why zero appreciation?
To face a possibly mild recession

Why not continued appreciation?
Continued appreciation would clearly be inappropriate. It would make our exports relatively more expensive to foreigners currencies and imports relatively cheaper to locals in local currencies. Assuming sum of PED of X and M > 1, (Marshal Learner condition holds): NX falls (TRx falls and TEm rises), AD falls: worsens fail in NY and Irade account balance and eyclical unN

Why not depreciation?
Threat of inflation is possibly present as well. Given our heavy dependence on Imports to sustain both consumption and production, the MAS cannot switch immediately to a policy of depreciation. To do so would risk re-kindling inflationary pressures. For example, ceteris paribus, a 10% depreciation would mean imported goods increase by 10% in terms Sing$.

Neutral or standstill policy is best?
Thus, in the view of the above circumstances, the most appropriate. policy is to adopt a neutral stance of zero rate appreciation until the MAS is more certain of the future outlook of the economy


If recession deepens such that the threat of lower national output is greater than the threat of imported inflation, then MAS should change policy to depreciation of currency.

However, the effectiveness of the exchange rate policy could be limited by the problem of time lag→ J-curve effect → Contractual obligations as well as taste and preference could mean that demand for Singapore’s X is p-inelastic in the very short run, depreciation of S$  will not improve net exports but worsened it instead. Worsens the harmful effects of the crisis!

In addition, the income effect could outweigh price effect whereby. the net exports may not improve – 1.e DDx fall larger due to elastic YED than the increase in DDX from elastic PED -rendering the policy ineffective and hence inappropriate.


Anti-thesis: Exchange rate policy might not be the most appropriate In managing the most harmful effects of the recent global economic crisis in Singapore.

Other policies must be Implemented to work hand in hand with it to achieve the objective of resolving the harmful effects of the recent global economic or financial crisis in Singapore.


Eg: How FP improve economic growth unemployment & cyclical unN
As the exchange rate policy requires the market adjustment process to take effect, a more direct and hence appropriate policy to improve actual economic growth and cyclical unemployment is the use of fiscal policy. This is also under the condition that Singapore has strong government reserves which allow her to the ability and ease to use the reserves to finance the policy, hence making the policy an appropriate one. The Singapore government conducts expansionary fiscal policy (EFP) with supply side effects which involves a boost in the construction sector → bringing forward of $1.3 billion of government projects to 2009.

Eg They include →HDB lift upgrading, building of park connectors, building Terminal 5 airport, upgrading of military facilities. These projects will lead to an Increase in G, Increasing AD via the multiplier effect in the SR as well as the Increase In LRAS In the LR.
[Explain the effects using the AD/AS framework and self-sketched diagram]


However, while the fiscal policy does bring about improvement in economic growth and cyclical unemployment, the nature of the monetary injection could be restricted to the construction sector. As the source of the crisis comes from the financial sector, mismatch in skills between the retrenched from the financial sector and construction sector may mean that problem of cyclical unemployment may not be resolved.

Hence, a more appropriate policy to resolve the problem; small k; G needs to be sufficiently large.


How wage policy (Jobs Support Scheme or JSS introduced in Unity Budget in Feb 2020, or Jobs Credit scheme or JCS in March 2009, both are wage support for employers to retain their local employees), to improve cyclical unemployment.

To sustain jobs for Singaporeans, the Government introduced a jobs Credit scheme which will encourage the businesses to preserve obs in the downturn. This is a temporary scheme to help companies through an exceptional downturn. Anchoring on the AD/AS framework, this will result in a rightward shift of the SRAS due to the fall in unit COP given the wage subsidy. Jobs can be preserved as during the downturn and resolve cyclical unemployment.


This is an appropriate policy targeted at resolving cyclical unemployment. As compared to one which provides a cash subsidy to the firm to tide over the difficult period, this specifically encourages preservation of jobs as the subsidy is on the CPF payrolls of the workers. In addition, as explained earlier, this approach is applicable to sectors beyond construction such as the finance and tourism sectors which are also severely hit by the crisis.


The exchange rate policy is one of the most appropriate policies in tackling the harmful effects of the global economic or financial crisis. This is due to nature of Singapore’s economy where the high trade reliance for growth meant that the improvement in net exports, to a large extent, may resolve the problems of low actual growth, cyclical unemployment and worsening of BOP.

However, the sole conduct of the exchange rate policy is not sufficient to tackle the deep and rapid recession. To have a more targeted approach and for effects to be more Immediate, the policy must be complemented with other policies such as the fiscal and wage policy.