Analysis of the Effectiveness of the Reserve Option Mechanism Used in the Framework of the New Monetary Policy Approach

Abstract

The post-global crisis has urged the "Central Bank of the Republic of Turkey (CBRT)" to design new monetary policy instruments, as have the central banks of many developing countries. In this prospect; reserve requirement ratio, reserve option mechanism (ROM) and asymmetric interest rate corridor instruments were put into practice. With the application, the effectiveness and success of the instruments in the subject began to be examined. In this context; the study aims to analyse the effect of the ROM in Turkey, on foreign exchange reserves, exchange rate, inflation uncertainty, inflation rate and interest rates and to review the effectiveness of the mechanism. In the study, "Generalized Autoregressive Conditional Heteroskedasticity (GARCH)" models were employed for analyses, covering the October 2011 – December 2018 period. Consequently, ROM's strength to influence financial fragility, exchange rate, inflation uncertainty, inflation and interest rates, was found to be limited.

Keywords

• reserve option mechanism
• financial stability
• garch models
• new monetary policy instruments
• reserve option coefficient