Foreign exchange intervention is carried out in support of the monetary policy objective of price stability and not for any macro-financial purposes. There is no explicit inflation target but the track record of keeping core inflation relatively stable and, on average, just below 2% over the last thirty years has underpinned the MAS’ policy credibility. Fiscal policy seeks to promote macroeconomic stability, sustained economic growth, and social equity while maintaining a balanced budget. It is set by the Ministry of Finance (MOF). The Constitution prohibits the use of public debt for government expenditure except for a narrow class of long-term infrastructure projects. Macro-financial policy comprises essentially of macroprudential measures aimed at promoting a sustainable property market. These measures are co-ordinated across the MAS, MOF, and Ministry of National Development (MND). The macroprudential toolkit comprises loan-to-value limits, debt servicing limits, buyers’ and sellers’ stamp duties, and adjustments in land supply. In the movie “Everything, Everywhere, All at Once”, we are told that parallel universes exist because every life choice creates a new alternative universe. Thankfully, the global economy and financial system are not as complicated as the multiverse. But the real economy and the financial economy are like parallel universes with many transmission channels across these two universes that we are only beginning to understand. Achieving coherence across policies through an integrated framework is key to minimising the risk of repeated bouts of financial and economic crises feeding on each other. It is not easy but probably not as difficult as jumping across the multiverse.
This could overcome a central difficulty of “lower for longer” strategies – how to make the commitment to delay lift-off credible given its inherent time inconsistency – by “tying the hands” of the policy committee to prevent it from reneging. One option, involving only a modest change to the current framework, is a “whites of their eyes” strategy, in which policy remains on hold until there is clear evidence that inflation has returned sustainably to target. Such an approach could be accommodated within the flexibility of current inflation targeting frameworks, as it would involve trading off somewhat higher inflation in future with lessening the constraint of the ELB today. There could be benefits to changing the remit to recognise explicitly that this is an acceptable use of flexibility. In this regard, the UK’s monetary framework could be well-suited to this strategy as a temporary approach to addressing constraints at the ELB. In particular, the annual confirmation of the MPC’s remit and use of open letters could promote the accountability of the Committee in pursuing this strategy. This underscores the importance of developing measures of core domestically generated inflation to help gauge when inflation has returned sustainably to target, as headline UK inflation can be pushed far from underlying domestic inflationary pressures due to movements in the exchange rate. A stronger variant would be to change temporarily the inflation target objective to build in a bias to stimulate at the lower bound.