The reserve option mechanizsm as an automatic stabilizer against capital flows: vector autoregressive (VAR) analysis

Abstract

Purpose- a result of the quantitative easing policies implemented by the central banks of developed countries after the 2008 global financial crisis, a large amount of liquidity was poured into the financial markets. This situation has caused a rapid capital flow to the economies of developing countries. In order to prevent the risks that these short-term rapid capital flows may pose on macroeconomic and financial stability, the central banks of the developing countries and the Central Bank of the Republic of Turkey have applied to non-traditional monetary policies to combat these risks. The aim of this study is to analyze the relationship between the utilization rate of the Reserve Option Mechanism (ROM), which has been implemented by the CBRT since September 2011, and between capital movements and exchange rates. Methodology- The relationship between the ROM utilization rate, exchange rate and capital movements was analyzed using the vector autoregressive (VAR) model. Since there is no distinction between dependent and independent variables in VAR models, all of the variables are included in the model internally and their effects on each other are tested. Findings- are that both the exchange rate and the CDS, which is used to represent capital movements, react to a one-unit standard deviation shock in the usage rate of the ROM, which is aimed to act as a buffer against the volatility caused by capital flows. Conclusion- The ROM acts as an auto-balancer, but this balancing mechanism does not occur in a symmetrical manner. Keywords: Reserve option mechanism, capital mobility, VAR analysis JEL Codes: E44, G01, G32