13 Jul 2018

The MAS – or Monetary Authority of Singapore – hardly springs to mind when thinking about making Singapore more productive.

Central banks like the MAS deal with printing money, saving banks, and fighting inflation. How could the MAS possibly help private companies boost their productivity?

Conventional wisdom states that central banks should stay out of the real economy. They can buy and sell government bonds to put money into the economy.

But that’s it.

Yet, according to our recent research, we find that central banks like the MAS may play a far more useful role in the real economy than previously thought.

Central banks might be able to influence the productivity of companies like SingTel, CapitaLand, and Wilmar by buying their stocks and bonds. How?

Central banks buy and sell government debt as part of their normal monetary policy.

The effects of buying private stocks and bonds

Using econometric analysis, we strip away these effects, and look only at the effects of Central banks buying private stocks and bonds.

These purchases help invest in companies when no one else will – often providing the scale of investment, expertise from around government, and stability.

Singapore has been far ahead of the curve in reaping the benefits of state ownership.

Most economists have deemed central bank purchases of private securities so heretical, that most central bank laws prohibit them.

Yet, economic crisis has changed all that.

The Bank of Japan – on the heels of its own home-made crisis -- has bought regular stocks and bonds for years now.

The US Federal Reserve, European Central Bank, Bank of England, and even the Bank of Russia started to follow suit after the 2008 financial crisis.

All the while, large government holdings like Temasek have provided government money – and advice – to companies in Singapore’s economy.

Thus, the MAS did not need to take the same activist approach to investing as other central banks have.

Countries that benefit

We find that only countries which meet certain requirements better benefit from these kinds of purchases.

These countries usually have low inflation, low interest rates, high public debt, poorly functioning banks and other investment outlets.

They also have an administration clean and independent enough to make good investment decisions.

Despite having a not-so-independent central bank, Singapore is one of the exceptions that would benefit from such purchases.

Such a lack of independence works to the Lion City’s advantage – as little corruption and highly competent bureaucrats allow government to help companies in ways impossible in most jurisdictions.

In that way, Singapore has already demonstrated the success of a variant of this model – with Temasek and other government support instead of the central bank’s private securities purchases.

The figure below shows the range of countries which might represent good candidates for these kinds of purchases.

Adopting a Nominal GDP Target

Singapore could make history yet again, if the MAS adopts a nominal GDP target.

Right now, most countries target inflation – leaving economic growth to chance.

We find that legislatures the world over could authorize their central banks to make these kinds of purchases most efficiently by asking them to hit a nominal GDP target.

Such a target requires the central bank to buy or sell public and private securities (among its other monetary policy levers) – both to tame inflation as well as push economic growth.

Singapore has been informally targeting such nominal GDP growth for decades.

Government, its state-owned enterprises and commercial groups talk, coordinate and do business together.

By making such an official target, investors in its international financial centre know the government’s commitment in helping companies of all kinds to grow by a certain amount.

Making History in Other Ways

The MAS could make history in other ways.

State-owned companies have valuable experience to share with regulated financial firms.

Imagine a central bank that shares growth-enhancing carrots, as well as wielding a regulatory stick?

The MAS could buy shares and transfer them to entities like Temasek instead of selling them too quickly.

Most countries do not have such an option.

But, Singapore’s case is unique.

Such purchases usually substitutes for government bond purchases.

Most countries should only use this policy when conventional monetary policy “fails.”

Yet, the MAS comes to this from a far better position than most central banks.

A Growth Mandate

America leads in the securitization of just about everything.

As we describe in our work, firms like US-headquartered Mosaic brought ‘pieces’ of ownership rights in hard assets like solar panel investments to sell to even residential investors.

The MAS’s policy remains conservative on securitisation, crowd funding, and other forms of finance.

Saying no is always easier than saying yes for a bank regulator.

Giving the MAS a growth mandate might make its own securities regulations friendlier to growth at home – instead of focusing on foreign investors.

If Temasek represented Singapore’s great contribution to 20th century development theory, maybe the MAS could represent its contribution to the 21st century.