http://www.mas.gov.sg/resource/download/Present2_files/v3_document.html
Under
Implementation of Monetary Policy
The actual operation of monetary policy has been influenced
by the institutional arrangement of the CPF and government
budgetary operations. Net contributions to the CPF and government
budget surpluses tend to reduce the liquidity in the banking
system. If not offset, it would put incipient pressure on the S$ to
appreciate.
Thus, the MAS has to act to restore this liquidity so as to
neutralise its effects on the S$. These actions largely take the
form of foreign exchange market intervention operations, in which
US dollars are purchased by the MAS through the creation of bank
reserves.
We adopt a policy of managed floating with regards to our exchange
rates.
We use our reserves to buy or sell US dollars, if you have negative
reserves, you need to borrow money to managed the exchange rates,
when you borrow money you need to pay interest. If you have a large
negative reserves like the US; how do you go about paying all the
debts if you maintain high exchange rate? Say initial exchange rate
is USD 1.00 : SGD 2.00, you depreciate your currency say USD 1.00 :
SGD 1.50, which makes the US product more competitive in the
international market. What initially cost SGD 20.00 would cost SGD
15.00 after the depreciation.
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