Reserve Option Mechanism as a Stabilizing Policy Tool: Evidence from Exchange Rate Expectations

15 Pages Posted: 24 Mar 2013

See all articles by Ahmet Degerli

Ahmet Degerli

affiliation not provided to SSRN

Salih Fendoglu

Central Bank of the Republic of Turkey

Date Written: March 22, 2013

Abstract

During the recent era, many emerging market economies have implemented unconventional policy measures to mitigate the effect of large swings in short-term capital flows on domestic business cycles. This paper focuses on a specific unconventional policy tool introduced by the Central Bank of Turkey, the Reserve Option Mechanism (ROM), that in principle contains excessive fluctuations in foreign exchange rate and helps cushion the economy from large swings in external factors. Controlling for a set of domestic and external common factors, the results show that USD/TL expectations have exhibited lower levels of volatility, skewness and kurtosis due to implementation of the ROM. Moreover, the higher the intensity of ROM (the fraction of ROM-based reserves in total international reserves) the stronger the effect of ROM on exchange rate expectations. Last, we provide evidence that the mechanism acts as an automatic stabilizer of expectations about excessive movements in the exchange rate: the mechanism decreases the sensitivity of expected USD/TL kurtosis to the common external factor (by an estimated decrease of about 85%).

Keywords: Options-based Exchange Rate Expectations, Reserve Option Mechanism, Unconventional Monetary Policy

JEL Classification: F31, F40

Suggested Citation

Degerli, Ahmet and Fendoglu, Salih, Reserve Option Mechanism as a Stabilizing Policy Tool: Evidence from Exchange Rate Expectations (March 22, 2013). Available at SSRN: https://ssrn.com/abstract=2237847 or http://dx.doi.org/10.2139/ssrn.2237847

Ahmet Degerli

affiliation not provided to SSRN

Salih Fendoglu (Contact Author)

Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

HOME PAGE: http://www.salihfendoglu.net

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