Reserve Options Mechanism and FX Volatility

Reserve Options Mechanism and FX Volatility

Title : Reserve Options Mechanism and FX Volatility
Number : 13/03
Author(s) : Arif Oduncu, Yasin Akçelik, Ergun Ermişoğlu
Language : English
Date : February 2013
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 in the sample period.
Keywords : Reserve Options Mechanism, Volatility of Turkish Lira, Central Bank of the Republic of Turkey’s Policy Mix, GARCH
JEL Codes : C12; C58; E58; G10

 

Reserve Options Mechanism and FX Volatility
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