Reserve Option Mechanism: Does It Work As An Automatic Stablizer?

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

Central Bank Review, 2015, vol. 15, issue 1, 1-18

Abstract: Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve options 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 paper, 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. We find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the weighted average cost of CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. 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. And 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: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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