Ergun Ermisoglu

The Turkish Approach to Capital Flow Volatility

The shock waves of the 2008-09 global financial crisis and the 2011-12 Eurozone debt crisis hit emerging markets from the trade, the finance and the expectations channels. We focus on the finance channel in this paper. We first discuss the challenges arising from capital flow volatility in emerging economies in general. We then focus on the Turkish approach and describe in detail the new policy mix implemented by the Central Bank of the Republic of Turkey during the 2008-2012 period and the results obtained. This approach differs from others in its emphasis on the use of macroprudential policy measures rather than capital flow measures for improving domestic financial stability in face of volatile capital flows.

Reserve Options Mechanism and FX Volatility

Reserve Options Mechanism (ROM), which is the option to hold FX or gold reserves in increasing tranches in place of Turkish Lira reserve requirements of Turkish banks, was designed and launched by the Central Bank of the Republic of Turkey (CBRT). ROM is a tool unique to the CBRT and it is aimed to support the FX reserve management of the banking system and to limit the adverse effects of excess capital flow volatility on the macroeconomic and financial stability of Turkey. In this paper, we study the effectiveness of ROM on the volatility of Turkish Lira, and to the best of our knowledge, it is the first analytical paper on investigating the effects of the ROM. The results suggest that ROM is an effective policy tool in decreasing the volatility of Turkish lira in the sample period.