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Reserve Option Mechanism : Does It Work As An Automatic Stablizer?

Author

Listed:
  • Oguz Arslaner
  • Ugur Ciplak
  • Hakan Kara
  • Doruk Kucuksarac

Abstract

Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve options mechanism (ROM) in order to alleviate the adverse impact of capital flow volatility on the domestic economy. Although there are numerous studies on the mechanics of ROM, there has been no attempt to investigate the determinants of the ROM utilization in practice. In this paper, we aim to fill this gap by using bank-level data to assess the behavioral aspects of ROM. Our results suggest that the relative cost of Turkish lira funding to foreign currency funding as well as the reserve option coefficients set by the CBRT largely explains the variations in the ROM utilization. We find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the weighted average cost of CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. We argue that the systematic policy induced movements in the short term domestic interest rates—higher during outflows, lower during inflows—may undermine the automatic stabilizer feature of ROM. And we propose an adjustment in the remuneration of reserve requirements to strengthen the automatic stabilizer effect of ROM.

Suggested Citation

  • Oguz Arslaner & Ugur Ciplak & Hakan Kara & Doruk Kucuksarac, 2015. "Reserve Option Mechanism : Does It Work As An Automatic Stablizer?," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(1), pages 1-18.
    • Handle: RePEc:tcb:cebare:v:15:y:2015:i:1:p:1-18
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Central+Bank+Review/2015/Volume+15-1/
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Murat Uysal, 2017. "Financial stability and macroprudential policy in Turkey," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy frameworks, implementation and relationships with other policies, volume 94, pages 349-364, Bank for International Settlements.
    4. Deren Unalmis & Ibrahim Unalmis, 2015. "Zorunlu Karsiliklara Faiz Odenmesi," CBT Research Notes in Economics 1501, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Bank for International Settlements, 2017. "Macroprudential frameworks, implementation and relationship with other policies," BIS Papers, Bank for International Settlements, number 94.
    6. 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.
    7. Ibrahim Yasar Gok, 2016. "Reserve Options Mechanism: The New Monetary Policy Tool of CBRT and Its Effect on Exchange Rate Volatility," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 9(3), pages 50-54, December.
    8. Akturk, Halit & Gocen, Hasan & Duran, Suleyman, 2015. "Money Multiplier under Reserve Option Mechanism," MPRA Paper 64803, University Library of Munich, Germany.

    More about this item

    Keywords

    Monetary policy; Reserve requirements; Capital flows; Financial stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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