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Reserve Option Mechanism as a Stabilizing Policy Tool : Evidence from Exchange Rate Expectations

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  • Ahmet Degerli
  • Salih Fendoglu

Abstract

During the recent era, many emerging market economies have implemented unconventional policy measures to mitigate the effect of large swings in short-term capital flows on domestic business cycles. This paper focuses on a specific unconventional policy tool introduced by the Central Bank of Turkey, the Reserve Option Mechanism (ROM), that in principle contains excessive fluctuations in foreign exchange rate and helps cushion the economy from large swings in external factors. The results suggest that, after the introduction the ROM (i) market expectations are leaned towards a significantly lower volatility or skewness in the USD/TL relative to other emerging market exchange rates; (ii) controlling for a set of domestic and common external factors, the USD/TL expectations have exhibited lower levels of volatility, skewness and kurtosis; (iii) the higher the intensity of ROM (the fraction of ROM-based reserves in total international reserves) the stronger the effect of ROM on exchange rate expectations. Last, we provide evidence that the mechanism acts as an automatic stabilizer of expectations about excessive movements in the exchange rate: the mechanism decreases the sensitivity of expected USD/TL kurtosis to the common external factor (by an estimated decrease of about 85%).

Suggested Citation

  • Ahmet Degerli & Salih Fendoglu, 2013. "Reserve Option Mechanism as a Stabilizing Policy Tool : Evidence from Exchange Rate Expectations," Working Papers 1328, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1328
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    Cited by:

    1. Aytuğ, Hüseyin, 2017. "Does the reserve options mechanism really decrease exchange rate volatility? The synthetic control method approach," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 405-416.
    2. Hakan Kara, 2016. "A brief assessment of Turkey's macroprudential policy approach : 2011–2015," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 16(3), pages 85-92.
    3. Ahmet Aysan & Salih Fendoglu & Mustafa Kilinc, 2014. "Managing short-term capital flows in new central banking: unconventional monetary policy framework in Turkey," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 4(1), pages 45-69, June.
    4. Yeldan A. Erinc & Kolsuz Gunes & Unuvar Burcu, 2014. "What to Smooth: Rate of Interest or the Foreign Exchange? Turkish Monetary Policy under Turbulent Times," Review of Middle East Economics and Finance, De Gruyter, vol. 10(3), pages 1-15, December.
    5. Hakan Kara, 2016. "Turkey's experience with macroprudential policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 123-139 Bank for International Settlements.
    6. repec:agr:journl:v:4(605):y:2015:i:4(605):p:133-144 is not listed on IDEAS
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    8. repec:spr:pharme:v:4:y:2014:i:1:p:45-69 is not listed on IDEAS
    9. Oduncu, Arif & Ermişoğlu, Ergun & Polat, Tandogan, 2013. "Credit Growth Volatility," MPRA Paper 49058, University Library of Munich, Germany.
    10. Akturk, Halit & Gocen, Hasan & Duran, Suleyman, 2015. "Money Multiplier under Reserve Option Mechanism," MPRA Paper 64803, University Library of Munich, Germany.
    11. Umit BULUT, 2015. "The Interest Rate Corridor as a Macroprudential Tool to Mitigate Rapid Growth in Credits: Evidence from Turkey," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(605), W), pages 133-144, Winter.

    More about this item

    Keywords

    Options-based Exchange Rate Expectations; Reserve Option Mechanism; Unconventional Monetary Policy;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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