Managing Short-Term Capital Flows in New Central Banking: Unconventional Monetary Policy Framework in Turkey

Ahmet Aysan, Salih Fendoglu () and Mustafa Kilinc

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: During the global financial crisis of 2008-2009, both advanced and emerging countries have implemented significant easing policies on monetary and fiscal fronts. Yet, the recovery, especially in advanced countries, was not as quick or strong as expected. These quantitative easing policies, coupled with weak recovery and restricted fiscal positions, have created not only abundant but also excessively volatile global liquidity conditions, leading to short-term and excessively volatile capital flows to emerging markets. To contain potential risks due to such flows, emerging countries have augmented their existing policy frameworks. Central Bank of the Republic of Turkey (CBRT), for example, has introduced two new policy tools in its new monetary policy framework: the asymmetric interest rate corridor and the reserve option mechanism. From a capital flows perspective, the interest rate corridor helps smooth fluctuations in supply of foreign funds, whereas the reserve option mechanism helps contain movements in demand for foreign funds. Both policies have been actively used by the CBRT and appeared to be effective in containing financial stability risks stemming from excessively volatile capital flows.

Keywords: Capital flows; macroprudential policies; central banking (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ara, nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (36)

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Related works:
Journal Article: Managing short-term capital flows in new central banking: unconventional monetary policy framework in Turkey (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1403

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