Monetary Sterilization of Capital Inflows through the Central-Provident-Fund Savings in Singapore

Abstract

This paper examines the monetary sterilization mechanism of the Singapore economy. We argue that, in the absence of a well-developed open financial market, the Central Provident Fund (CPF) has in fact played a role as a quasi-market mechanism in sterilizing the effect of foreign-exchange assets inflow. Using the error-correction-mechanism (ECM) approach, we model the implicit monetary sterilization mechanism and estimate the offset coefficient between the net-domestic-credit component and the net-foreign-asset component of the monetary base. The estimated ECM regression coefficient suggests that monetary sterilization in Singapore is nearly perfect for the 1984–1995 period. The estimates of other macroeconomic relations also support the hypothesis of the quasi-market monetary sterilization mechanism.