"Let the FX to depreciate."

This is a follow up to my previous post regarding how monetary policy can remain potent even under zero lower bound. In the post, I pointed out that there are three ways. Those are announcing its attention with a higher inflation target, letting the FX depreciate, and money-financed transfer. In this post, I shall pay attention a little bit on the second option.

As far as I know, there is only one central bank in the world that conducts its monetary policy by managing its exchange rate: the Monetary Authority of Singapore (MAS). This is unique since almost every central bank we know, managing its money supply or interest rate, is the common tool in conducting its monetary policy.

You may ask, why Singapore uses the exchange rate to conduct its monetary policy? First of all, we need to understand the nature of its economy itself.

Singapore is located in the middle of the busiest trading route globally, where Strait of Malacca is located on the west, and South China Sea in the east. Therefore, trading is the backbone of Singapore's economy even before its independence. 

According to the latest statistics by World Bank, Singapore's exports of goods and services stands at around 173 percent of GDP. Therefore it is relevant that the central bank to manage its exchange rate to avoid huge volatility or sharp appreciation or depreciation.

Source: World Bank

Therefore, this raises the question. For countries, let's say Thailand, South Korea (for the reasons I mentioned in my previous post), or perhaps Malaysia with a relatively low share of exports of goods and services per GDP, can these central banks replicate the MAS' framework? Worth pondering.

Note: Parrodo (2004) explained in detail how Singapore's monetary policy works. Click here to view the article.