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

Huseyin Aytug ()

International Review of Economics & Finance, 2017, vol. 51, issue C, 405-416

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.

Keywords: FX intervention; Synthetic control method; Required reserves (search for similar items in EconPapers)
JEL-codes: C31 E58 F31 O11 O19 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:51:y:2017:i:c:p:405-416

DOI: 10.1016/j.iref.2017.07.004

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