Alternative Tools to Manage Capital Flow Volatility
Heightened volatility in cross-border capital flows has increased exchange rate volatility across emerging markets as well as in advanced economies, setting the stage for more active management of currencies. Traditionally, foreign exchange rate intervention has been the primary tool to address these types of challenges. However, given the limitations of foreign exchange rate intervention, it may be well worthwhile to explore alternative mechanisms for dealing with capital flow volatility. This paper explains how the new policy framework adopted by the Central Bank of the Republic of Turkey (CBRT) in the past two years has eased the need to conduct FX interventions. We first describe the rationale for the new policy framework, which is an augmented version of inflation targeting, with more emphasis on macro financial risks. Next, we explain the new instruments developed by the CBRT and their contribution to coping with capital flow volatility. In particular, we focus on the Reserve Option Mechanism, which is designed as a shock absorber for volatile capital flows, and thus reduces the need for FX intervention. We demonstrate that, since the adoption of new policy tools, the volatility of the Turkish lira has been remarkably low in comparison with the currencies of peer economies.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (90 312) 507 5000
Fax: (90 312) 507 5640
Web page: http://www.tcmb.gov.tr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yasin Akcelik & Ergun Ermisoglu & Arif Oduncu & Temel Taskin, 2012. "Ek Parasal Sikilastirma’nin Doviz Kurlari Uzerindeki Etkisi," CBT Research Notes in Economics 1230, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- Koray Alper & A. Hakan Kara & Mehmet Yorukoglu, 2012.
"Reserve Option Mechanism,"
CBT Research Notes in Economics
1228, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
When requesting a correction, please mention this item's handle: RePEc:tcb:wpaper:1331. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ozlem Ekmekciler Ramalho Rocha)or (Ilker Cakar)
If references are entirely missing, you can add them using this form.