Reserve Option Mechanism: Does it Work as an Automatic Stabilizer?

Oguz Aslaner, Ugur Ciplak (), Hakan Kara and Doruk Küçüksaraç

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

Abstract: Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve option 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 note, 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. In this context, we find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the cost of weighted average CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. In light of these findings, 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. In the conclusion part, we propose an adjustment in the remuneration of reserve requirements to strengthen the automatic stabilizer effect of ROM.

Keywords: Monetary policy; Reserve Requirements; Capital flows; Financial Stability (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F32 (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 (3)

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Journal Article: Reserve Option Mechanism: Does It Work As An Automatic Stablizer? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1438

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