Financial Stability and Reserve Option Mechanism as Automatic Stabilizer

Authors : Bengül Gülümser KAYTANCI, Burak BUYUN

Pages : 410-429

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Publication Date : 2020-03-13

Article Type : Research Paper

Abstract :The Reserve Option Mechanism (ROM) is a macro-prudential policy instrument that allows the holding of a certain portion of the Turkish Lira required reserves in foreign currency or gold. This study contains the automatic stabilizer feature of ROM designed by the Central Bank of the Republic of Turkey (CRBT) to provide post-crisis financial stability which investigates through vector error correction (VEC) model. Automatic stabilizer function of ROM was investigated the effect of capital flows, exchange rate and usage of ROM variables on ROM by the impulse response analysis. As a result of impulse response analysis findings show that the ROM works as an automatic stabilizer, but this function is not symmtrical and efficient, and works of ROM will be better with more stable financial system.
Keywords : reserve options mechanism, financial stability, impulse response analyses, macro prudential policies