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Reserve Options Mechanism: A New Macroprudential Tool to Limit the Adverse Effects of Capital Flow Volatility on Exchange Rates

Arif Oduncu, Yasin Akcelik and Ergun Ermisoglu

Central Bank Review, 2013, vol. 13, issue 3, 45-60

Abstract: 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 during the sample period.

Keywords: Reserve Options Mechanism; Volatility of Turkish lira; Central Bank of the Republic of Turkey’s Policy Mix (search for similar items in EconPapers)
JEL-codes: C12 C58 E58 G10 (search for similar items in EconPapers)
Date: 2013
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