Effectiveness of the reserve option mechanism as a macroeconomic prudential tool: evidence from Turkey

Abstract

This article assesses the effectiveness of a novel macroprudential tool - the reserve option mechanism (ROM) - which Turkey's central bank developed during the post-2008 period and has employed to control the risk associated with excessive capital flows. We assess how capital flows have affected economic variable changes since the introduction and usage of the ROM. Empirical evidence gathered from Turkey suggests that the tool decreases the effect of capital flow on capital flow (positive shock to capital flow dies out faster or becomes less persistent) and diminishes the effects of capital flow shocks on exchange and interest rates.