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Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach

Aytug, Huseyin (2016): Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach.

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Abstract

After the invention of the Reserve Option Mechanism (ROM) by the Central Bank of Turkey, it has been debated whether it can help decrease the volatility of foreign exchange rate. In this study, I apply a new micro-econometric technique, the synthetic control method, in order to construct a counterfactual foreign exchange rate volatility in the absence of the ROM. I find that, USD/TRY rate is less volatile under the ROM. However, the ROM has not worked efficiently after the announcement of FED's tapering in May 2013. Furthermore, the ROM could have decreased the volatility of foreign exchange rate if FED had not started tapering.

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