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MACROPRUDENTIAL POLICIES AS BUFFER AGAINST VOLATILE CROSS-BORDER CAPITAL FLOWS

MACROPRUDENTIAL POLICIES AS BUFFER AGAINST VOLATILE CROSS-BORDER CAPITAL FLOWS This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing [Bruno and Shin (2013a). Capital flows, cross-border banking and Global liquidity. Working paper, Princeton university; Bruno and Shin (2013b). Assessing macroprudential policies: Case of Korea. Working paper, Princeton university] methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Singapore Economic Review World Scientific Publishing Company

MACROPRUDENTIAL POLICIES AS BUFFER AGAINST VOLATILE CROSS-BORDER CAPITAL FLOWS

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Publisher
World Scientific Publishing Company
Copyright
Copyright ©
Subject
Macro and Finance
ISSN
0217-5908
eISSN
1793-6837
DOI
10.1142/S0217590815500010
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing [Bruno and Shin (2013a). Capital flows, cross-border banking and Global liquidity. Working paper, Princeton university; Bruno and Shin (2013b). Assessing macroprudential policies: Case of Korea. Working paper, Princeton university] methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.

Journal

The Singapore Economic Review – World Scientific Publishing Company

Published: Mar 1, 2015

Keywords: Capital flows Macroprudential policies

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