Cross-Border Portfolio Flows and the Role of Macroprudential Policies: Experiences from Turkey

Abstract

The last three decades have been marked by financial market globalisation and a higher degree of integration of emerging markets into the world economy. One distinct feature of this in integration has been a sharp increase in portfolio flows between advanced and emerging market countries. Since the global financial crisis of 2008–09, these flows have become very sensitive to the monetary policy stance, interest rates and central bank balance sheets of advanced economies. Coupled with prevailing policy uncertainties, this has made global portfolio flows highly volatile, and accordingly has given rise to serious challenges for emerging market countries. To contain the potentially undesirable effects of these flows on their domestic real and financial cycles, emerging market countries have implemented a battery of macroprudential policies. Turkey has been proactive in devising an augmented policy framework to limit such undesirable effects, using policy tools such as reserve requirements, the Reserve Option Mechanism and the interest rate corridor. This note uses a cross-country data set covering 2005–12, and shows that the policy framework in Turkey has been effective in decreasing the sensitivity of portfolio flows to global risk factors.

Full publication: The Transmission of Unconventional Monetary Policy to the Emerging Markets

Keywords: Portfolio flows, risk-taking channel, macroprudential policies, Turkey

JEL Classification: E44, E52, E58