Monetary Policy in the Post Crisis Period: The Turkish Perspective

Transcription

1 Monetary Policy in the Post Crisis Period: The Turkish Perspective Hakan Kara Economic Research Forum Conference İstanbul April 19, 2013

2 Outline 1. Motivation of the New Policy Framework 2. New Instruments Interest Rate Corridor Reserve Option Mechanism 3. Evidence 4. Conclusion 2

3 Why do we need unconventional policies? (UP) Different motivations for the advanced and emerging economies Advanced economies conduct UP because a single interest rate framework is not enough to provide the desired stimulus Emerging economies conduct UP mainly as a response to UP of advanced economies 3

4 Capital Flows Equity and Bond Flows to Developing Economies (13-week moving average, billion US dollars) Source: EPFR. Last Observation: April 3,

5 Capital Flows: Turkey vs. Developing Countries 1,2 (Billion US dollars) 13-week moving average 6 1,0 Turkey All developing countries (right axis) 5 0,8 4 0,6 3 0,4 2 0,2 1 0,0 0-0,2-1 -0,4-2 -0,6-3 Source: EPFR, CBRT. Last Observation: 05 April

6 Oca.07 Tem.07 Oca.08 Tem.08 Oca.09 Tem.09 Oca.10 Tem.10 Oca.11 Tem.11 Oca.12 Tem.12 Oca.13 Capital Flows and Credit in Turkey Net Capital Inflows (12-month cumulative, billion USD) Net Annual Credit Use (adjusted for the effect of changes in exchange rates, billion TRL) Source: CBRT. Net credit use is annual change in total credit stock. Capital flows are 12-month cumulative. 6

7 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 Credit and Real Exchange Rate Cycles (HP filtered, standardized) 2 1,5 1 0,5 0-0,5-1 -1,5-2 Loans (t) REER (t+3) Source: CBRT. 7

8 Capital Flows and GDP Growth in Turkey Net Capital Flows/GDP GDP Growth Rate -8 Source: CBRT 8

9 Amplifying Role of Cross Border Capital Flows Improvement in Risk Perceptions Capital Inflows External Borrowing Currency appreciation Easier external finance Balance sheet effects and easing credit standards 9

10 MAIN GOAL: Searching for a new framework Design a new framework to Alleviate the impact of volatility in capital flows on the domestic economy Reduce the sensitivity of credit and exchange rate cycles to capital flows Break the vicious circle by weakening the amplifying channels, without hampering price stability objective. 10

11 The New Policy Framework 11

12 Policy Framework Price Stability Price Stability Financial Stability Policy Rate Structural Tools Cyclical Tools 12

13 Structural Tools Maturity Based Reserve Requirements Leverage Based Reserve Requirements Reserve Options Mechanism 13

14 Cyclical Tools Policy Rate Interest Rate Corridor TL Liquidity Management FX Liquidity Management 14

15 Transmission Mechanism INSTRUMENTS KEY INDICATORS OBJECTIVES Reserve Requirement Macroprudential Tools Credit Policy Expectations Price Stability Weekly Repo Interest Rate Policy Credit Growth Interest Rate Corridor Funding Strategy Liquidity Policy Exchange Rate Financial Stability 15

16 Exchange Rate, Credit and Financial Stability Gourinchas and Obstfeld (2012): Two factors emerge as the most robust and significant predictors of financial crises: rapid increase in leverage sharp real appreciation of the currency. Schularick and Taylor (2012) Role of leverage (credit growth) in financial vulnerability 16

17 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. 17

18 Exchange Rate, Credit and Price Stability Reducing the volatility of FX also helps price stability given the still-high exchange rate pass-through in Turkey Smoothing credit cycles help to dampen demand volatility and thus the fluctuations in the output gap 18

19 Financial and Price Stability Smoothing credit and exchange rate cycles not only supports financial stability by dampening the leverage cycles but also helps price stability given the high exchange rate pass-through in Turkey. Moreover, implies a more balanced growth path. 19

20 New Instruments 20

21 Practical Implementation of the New Framework Developing new instruments to weaken the impact of capital flows on credit and exchange rates. Two novel instruments: Asymmetric Interest Rate Corridor (ARC) Reserve Options Mechanism (ROM) 21

22 Asymmetric Interest Rate Corridor 22

23 Typical Operational Framework Under IT Framework Late Liquidity Lending Rate O/N Lending Rate Interest Rate Corridor O/N Borrowing Rate O/N Lending Rate to Market Makers CBT Policy Rate (One Week Repo) Secondary Market Interest Rate Late Liquidity Borrowing Rate 10:00 11:00 16:00 17:00 Hours Interbank + OMO Late Liquidity Window 23

24 Operational Framework Under Conventional IT (Simplified) CBT Lending Rate CBT Policy Rate (One Week Repo Rate) CBT Borrowing Rate Secondary Market Interest Rate 24

25 Capital Outflows (Risk off) CBT Lending Rate Secondary Market Interest Rate CBT Policy Rate (One Week Repo Rate) CBT Borrowing Rate 25

26 Capital Inflows (Risk on) CBT Lending Rate CBT Policy Rate (One Week Repo Rate) Secondary Market Interest Rate CBT Borrowing Rate 26

27 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implementation of the Corridor QE2 and the active use of the interest rate corridor Intensification of Euro Area Crisis CBRT O/N lending rate CBRT O/N borrowing rate ISE O/N Rate CBRT Weekly Repo Rate ISE liquidity shortage (right axis, billion TL) Source: CBRT. 27

28 Reserve Requirement Policy TL Reserve Requirements FX Reserve Requirements 18 The Range of RRR Weighted Average RRR 14 The Range of RRR Weighted Average RRR QE2 EZ Crisis Source: CBRT. Last Observation: February 2013 Source: CBRT. Last Observation: February

29 Reserve Options Mechanism (ROM) 29

30 Definition of ROM ROM is a mechanism that provides the banks the option to hold a certain fraction of their TL RRs in FX and/or gold To what extent the banks will use ROM will depend on the relative cost of using the facility The CBRT can alter this cost by changing Reserve Option Coefficients (ROC) The cost will also depend on relative price of FX vs TL funding 30

31 Reserve Options Mechanism (ROM) Reserve Option Coefficients for FX Reserve Option Coefficients for Gold 3 3 2,5 2, ,5 1, ,5 0, Percentage of TL RR held in FX Percentage of TL RR held in Gold Source: CBRT. As of April 19,

32 Threshold ROC For each bank, there is a threshold ROC (𝑅𝑂𝐶 𝑡𝑟 ) that makes the bank indifferent between using and not using the facility. This level will depend on the relative cost of FX and TL funding: 𝑅𝑂𝐶 𝑡𝑟 𝑟𝑡 𝑇𝐿 = 𝐸 𝑒𝑡+1 𝑟𝑡 𝐹𝑋 𝑒𝑡 where, 𝑟𝑡 𝑇𝐿 : cost of TL funding, 𝑟𝑡 𝐹𝑋 : cost of FX funding 𝑒𝑡 : spot exchange rate at the beginning of the maintenance period 𝐸 𝑒𝑡+1 : expected exchange rate for the end of the maint. period. 32

33 Reserve Option Mechanism: Automatic Stabilizer Reserve Option Coefficients (ROC) Threshold ROC Effective Utilization Ratio Upper Limit for Reserve Option Ratio 33

34 Benefits of ROM Automatic stabilizer: dampens the impact of capital flow volatility on domestic macroeconomic variables Weakens the adverse feedback loop between capital flows, exchange rate, and bank lending Market friendly and efficient mechanism 34

35 An illustration of the interaction between, capital flows, credit, and exchange rate: The role of ROM 35

36 Amplifying Role of Cross Border Capital Flows Improvement in Risk Perceptions Capital Inflows External Borrowing Currency appreciation Easier external finance Balance sheet effects and easing credit standards 36

37 Exchange Rate is a function of credit (C) and risk premium (rp) Credit E(C;rp) 0 0 Appreciation Exchange Rate 37

38 At the same time capital inflow is a function of exchange rate Credit C(E) E(C;rp) 0 0 Appreciation Exchange Rate 38

39 Suppose initially the economy is at high exchange rate low credit state Credit C(E) C a E(C;rp) 0 0 E Appreciation Exchange Rate 39

40 A sudden improvement in the risk appetite Credit C(E) falling risk premium C 0 0 E Appreciation a E(C;rp) E(C;rp') Exchange Rate 40

41 May start a chain reaction Credit C(E) falling risk premium C 0 0 E Appreciation a E(C;rp) E(C;rp') Exchange Rate 41

42 And shift the economy to a low exchange rate high credit state Credit C(E) falling risk premium C' a' C 0 0 E' E Appreciation a E(C;rp) E(C;rp') Exchange Rate 42

43 Yet, the final impact would be more limited with ROM Credit C(E) falling risk premium falling risk premium under ROM C' C a' a C 0 a 0 E' E Appreciation E E(C;rp) E(C;rp') Exchange Rate 43

44 Have new instruments weakened the impact of capital flows to domestic macroeconomic variables? 44

45 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) 90 CAD Net Capital Inflows Net Capital Inflows (adjusted for ROM and RRR) Source: CBRT. Last Observation: February

46 Volatility of the Turkish lira and other EM currencies against USD (30 days moving average) 1,9 1,7 1,5 1,3 1,1 0,9 0,7 0,5 0,3 0,1 New Policy Instruments Other EM Currencies No FX interventions beyond this point Turkish lira * Countries with current account deficits are Brazil, Chile, Columbia, Czech Republic, Hungary, Indonesia, Mexico, Poland, Romania, South Africa, and Turkey. 46

47 Curtosis of the Implied Distribution of Turkish lira and other EM Currencies against USD (30 days moving average) * The shaded area denotes the maximum and minimum of the Kurtosis of FX expectations for 10 emerging economies with current account deficits. Source: Değerli and Fendoğlu (2013) 47

48 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: April

49 Conclusion New policy framework has been effective in reducing macro financial risks in Turkey without hampering inflation objective. 49

50 Monetary Policy in the Post Crisis Period: The Turkish Perspective Hakan Kara Economic Research Forum Conference İstanbul April 19, 2013