Capital Flows, Financial Stability, and Monetary Policy

Transcription

1 Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki Central Bank of Turkey National Seminar on Developing a Programme for the Implementation of the 2008 SNA and Supporting Statistics in Turkey 10 September 2013 Ankara, Turkey

2 Outline 1. Monetary Policy since Capital Flows and Implications for Monetary Policy 3. New Monetary Policy Framework 4. New Policy Instruments 5. Evidence and Conclusion 2

3 Monetary Policy Since : Implicit Inflation Targeting (IT) : Full-fledged conventional IT : Adjusting to the post crisis conditions Late 2010-to date: Incorporating Financial Stability Objective into the Inflation Targeting Framework (with special emphasis on capital flows) 3

4 Capital Flows and Implications for Monetary Policy 4

5 01/06 04/06 07/06 10/06 01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12 10/12 01/13 04/13 Portfolio Flows to Emerging Economies Equity and Bond Flows to Emerging Market Economies (4-Week Moving Sum, Billion USD) Bonds Equities Collapse of Lehman Brothers Source: Emerging Portfolio Fund Research (EPFR) 5

6 Capital flows: challenges Capital flows may have important benefits, but they pose big challenges for macroeconomic policy as well: Sudden reversals (stops) can have very large adverse effects on real and/or financial sector. Procyclical flows amplify macro-financial fluctuations, rather than dampening them. 6

7 Capital Flows and GDP Growth in Turkey Net Capital Flows/GDP GDP Growth Rate Source: CBRT 7

8 Capital flows: why bother now? Historically the main source of volatility in Turkey has been cross border capital flows, why bother now? Size and volatility of capital flows have increased even more during the post-crisis period More importantly, it is mainly driven by global factors. Less related to domestic fundemantals Inefficient and distortionary 8

9 Emerging Market Currencies Against USD* Collapse of Lehman Brothers %-80% Interval of EMs EM Average 0.75 Emerging Economies: Brazil, Chile, Colombia, Czech Republic, Hungary, Indonesia, Malaysia, Mexico, Philippines, Poland, Romania, South Africa, Korea. 9

10 Portfolio Flows: Turkey vs. Developing Countries 1.2 (Billion US dollars) 13-week moving average Turkey All developing countries (right axis) Source: EPFR, CBRT. 10

11 Capital Flows and Macro-Financial Risks: Turkish economy as of late

12 2007: : : : : : : : : : : : : : : : : : : : :01 Turkish Economy as of late 2010: Sharp Increase in the Current Account Deficit, Financed with Short-term Inflows Current Account Balance (Seasonally Adjusted, Quarterly Average, Billion USD ) Main Sources of External Financing* (12-months Cumulative, Billion USD) Portfolio and Short-Term* FDI and Long-Term** Current Account Deficit CAB CAB (excluding energy) Source: TURKSTAT, CBRT. *Short-term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. Long-term capital movements are sum of banking and real sectors long term net credit and bonds issued by banks and the Treasury. Source: CBRT.

13 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Turkish Economy as of late-2010: Rapid Credit Growth, and Sharp Appreciation of Domestic Currency Total Loan Growth Rates (13 Weeks Moving Average, Annualized, FX Adjusted, Percent) Real Exchange Rate (2003=100) Source: CBRT

14 Searching for a new policy framework MAIN GOAL: Design a new framework to correct the cyclical part of the current account deficit, by reducing overborrowing and overvaluation, alleviate the impact of excessive volatility in capital flows on the domestic economy, reduce the sensitivity of credit and exchange rate cycles to capital flows, without jeopordazing price stability objective. 14

15 Can we do it with conventional Inflation Targeting? When global liquidity shocks dominate, using single instrument under IT may exacerbate the trade-offs For example, during capital inflows there are two options: i => further appreciation => wider CA deficit, sudden stop risks increase i => overheating => higher inflation Multiple objectives, multiple instruments are needed. 15

16 The New Policy Framework 16

17 Policy Framework Price Stability Price Stability Financial Stability Policy Rate Interest Rate Corridor Reserve Options Policy Rate, etc 17

18 Financial Stability: How can Monetary Policy Contribute? Monetary policy can contribute to financial stability by reducing the probability of a sudden stop, and by dampening the amplification mechanisms triggered by capital flows. smoothing credit and exchange rate cycles 18

19 Transmission Mechanism INSTRUMENTS REFERENCE INDICATORS OBJECTIVES Reserve Requirement Reserve Options Interest Rate Corridor Funding Strategy Policy Rate Macro prudential Policy Liquidity Policy Interest Rate Policy Credit Growth Exchange Rate Price Stability Financial Stability 19

20 The link between credit, exchange rate, and final objectives Smoothing credit and exchange rate cycles supports financial stability by dampening the leverage cycles and lowering the probability of a sudden stop, helps price stability through lower inflation volatility, given the high exchange rate pass-through in Turkey, and implies a more balanced growth path. 20

21 Have new instruments weakened the impact of capital flows to domestic macroeconomic variables? 21

22 01/07 03/07 05/07 07/07 09/07 11/07 01/08 03/08 05/08 07/08 09/08 11/08 01/09 03/09 05/09 07/09 09/09 11/09 01/10 03/10 05/10 07/10 09/10 11/10 01/11 03/11 05/11 07/11 09/11 11/11 01/12 03/12 05/12 07/12 09/12 11/12 01/13 Current Account and Capital Flows Current Account Deficit and Net Capital Inflows (12 Month Cumulative, Billion USD) CAD Net Capital Inflows Source: CBRT. Last Observation: February

23 Volatility of the Turkish lira and other EM currencies against USD (30 days moving average) New Policy Instruments Other EM Currencies Turkish lira 0.1 * Countries with current account deficits are Brazil, Chile, Columbia, Czech Republic, Hungary, Indonesia, Mexico, Poland, Romania, South Africa, and Turkey. 23

24 04/06 07/06 10/06 01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12 10/12 01/13 04/13 Inflation Expectations 10 9 Adoption of New Policy Framework months 6 24 months Source: CBRT. Last Observation: May

25 Macroeconomic Outcomes of the New Monetary Policy Framework 25

26 Economic Activity 170 Gross Domestic Product and Private Final Domestic Demand (Seasonally Adjusted, 2003=100) 160 GDP Private Final Domestic Demand Source: TURKSTAT, CBRT. Last Observation: 2013Q1 26

27 Real Exchange Rate CPI Based REER (Base year: 2003) QE2 Policy Reaction - I REER 2 percent 1.5 percent EZ Crisis Policy Reaction - II 80 Source: CBRT. 27

28 * Change in Credit Stock /GDP Turkey EM Average** Policy Reaction * Forecast for ** Emerging market countries included in the average are: Argentina, Bolivia, Brazil, Chile, China, Colombia, India, Indonesia, Malaysia, Mexico, Paraguay, Peru, Philippines, Poland, Russian Federation, Slovenia, South Africa, Thailand, Turkey and Uruguay. Source: World Bank.. 28

29 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 Credit and Current Account Net Credit Use and Current Account Deficit (annual, percent of GDP) Net Credit Use / GDP (%) Current Account Deficit / GDP (%) Source: CBRT. Net credit use is annual change in total credit stock. Current account is in annual terms. 29

30 Conclusion Heightened volatility in cross-border flows have prompted Central Bank of Turkey (CBT) to change its policy framework by incorporating financial stability into the inflation targeting regime. The new policy set-up and the tools developed by the CBT have eased the trade-offs posed by cross border capital flows. New policy framework has been effective in reducing macro financial risks in Turkey without hampering inflation objective. 30

31 Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki Central Bank of Turkey National Seminar on Developing a Programme for the Implementation of the 2008 SNA and Supporting Statistics in Turkey 10 September 2013 Ankara, Turkey