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Does the reserve options mechanism really decrease exchange rate volatility? The synthetic control method approach

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  • Aytuğ, Hüseyin

Abstract

After the invention of the Reserve Option Mechanism (ROM) by the Central Bank of Turkey (CBRT), it has been debated whether it can help decrease the volatility of foreign exchange rate. In this study, I apply a new microeconometric technique, the synthetic control method, in order to construct counterfactual foreign exchange rate volatility in the absence of ROM. I find that, USD/TRY rate is less volatile under ROM. However, it has not worked efficiently after CBRT raised interest rates as a reaction to the tapering tantrum in June 2013. Furthermore, it could have decreased the volatility of foreign exchange rate if CBRT had not increased interest rates as a reaction.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:405-416
    DOI: 10.1016/j.iref.2017.07.004
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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
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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