Ong Chong Tee: Financial economics Opening address by Mr Ong Chong Tee, Deputy Managing Director of the Monetary Authority of Singapore, at the SKBI Annual Conference on “Financial economics”, at Singapore Management University (SMU), Singapore, 7 May 2012. *  *  *  Professor Arnoud De Meyer, President of Singapore Management University Distinguished guests, ladies and gentlemen, good morning. Introduction It gives me great pleasure to join you today at SKBI’s second Annual Conference on Financial Economics. Since its establishment in 2008, SKBI has pursued research on topics in economics and finance relevant to Asia and the Singapore economy. A recent working paper on “Testing for Multiple Bubbles” by Phillips, Shi and Yu, for example, sheds light on techniques for identifying asset price bubbles, and has useful implications for the surveillance strategies of central banks.1 I am privileged to join an outstanding line-up of speakers including keynote speaker Professor Sir James Mirrlees. I think some of you may be familiar with his groundbreaking work on optimal tax policy, and his modelling of the key role uncertainty plays in economics. The Mirrlees Review, a recent review of the UK tax system chaired by Sir James, offers invaluable practical lessons on optimal tax design, including specific recommendations for the taxation of savings and wealth. Structural change in the Singapore economy The perfect financial storm of the recent crisis severely disrupted markets and economies, and also shook key tenets fundamental to our understanding of economics and finance.

In other words, why is inflation higher than what we have experienced historically, and is monetary policy responding in an optimal way? Implications for Inflation First, it is important to recognise the complex interplay of demand and supply factors underpinning the recent price developments in Singapore. Demand-side pressures on prices have built up as domestic economic activity rebounded strongly from the Great Recession of 2008/09. Regional demand has been firm, supporting the continued expansion of many of our services industries, while strong employment conditions in Singapore have underpinned robust consumption growth for a range of goods and services. Sustained low global interest rates and capital inflows have supported the demand for housing – a point I will return to later. At the same time, supply-side factors have become more significant, with the immediate constraints in labour and housing markets pushing up domestic costs. These reflect structural capacity constraints in the economy. Policy measures are being put in place to help the economy transit to a more sustainable model of productivity-led growth, as Singapore’s reliance on foreign workers is reduced. As the economy adapts and productivity growth rises, price pressures are likely to subside and provide a lift to real wages, making Singaporean workers better off. Implications for monetary policy My second observation is that the monetary policy stance has to be carefully calibrated to take into account the multiple influences on consumer prices. Monetary policy should act decisively to ease short-term inflationary pressures driven by strong demand, through applying an appropriate constraint on overall economic activity.