MR ADAM Le Mesurier's lament last Thursday ('Macro element missing in commentary') over the lack of activist monetary policy by the Monetary Authority of Singapore (MAS) overlooks the fact that the extreme openness of Singapore's financial sector severely restricts the extent to which MAS is able to control monetary policy fundamentals in the Singapore macro- economy.

He suggests that asset price bubbles result in significant medium-term output contractions, but MAS currently does not commit to using monetary policy to influence these bubbles as they may have limited effect on longer-term output and growth stability.

He exhorts MAS to take into account medium-term output stability as well, and clamp down on asset price bubbles through monetary policy.

While admirable as a policy goal, the policy tools of interest rates and open- market operations operate indirectly on the financial sector through expectations of future lending rates, limiting their usefulness in the medium term.

Moreover, monetary policy has limited usefulness in our extremely open economy, as our domestic interest rates are more significantly determined by external financial flows and forces than domestic forces.

Finally, the effects of monetary policy stretch far beyond the asset market, and using this sweeping tool to address a niche problem will result in other unintended consequences.

I would argue that policies that directly limit speculation in fixed assets, which address the root cause of bubbles, are far more effective and result in less side effects.

While abstract debate about policy is healthy, it should also take into account the realities on the ground.

Tan Jiaqi

This article was first published in The Straits Times.