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Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach

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  • Aytug, Huseyin

Abstract

After the invention of the Reserve Option Mechanism (ROM) by the Central Bank of Turkey, it has been debated whether it can help decrease the volatility of foreign exchange rate. In this study, I apply a new micro-econometric technique, the synthetic control method, in order to construct a counterfactual foreign exchange rate volatility in the absence of the ROM. I find that, USD/TRY rate is less volatile under the ROM. However, the ROM has not worked efficiently after the announcement of FED's tapering in May 2013. Furthermore, the ROM could have decreased the volatility of foreign exchange rate if FED had not started tapering.

Suggested Citation

  • Aytug, Huseyin, 2016. "Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach," MPRA Paper 71400, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:71400
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    References listed on IDEAS

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    More about this item

    Keywords

    FX Intervention; Synthetic Control Method; Required Reserves;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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