Capital Flows, Financial Stability, and Monetary...
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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
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Outline
1. Monetary Policy since 2001
2. Capital Flows and Implications for Monetary Policy
3. New Monetary Policy Framework
4. New Policy Instruments
5. Evidence and Conclusion
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Monetary Policy Since 2001
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2001-2006: Implicit Inflation Targeting (IT)
2006-2008: Full-fledged conventional IT
2009-2010: 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)
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Capital Flows and Implications for Monetary Policy
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Source: Emerging Portfolio Fund Research (EPFR)
Equity and Bond Flows to Emerging Market Economies (4-Week Moving Sum, Billion USD)
Portfolio Flows to Emerging Economies
-20
-15
-10
-5
0
5
10
15
20
25
30
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
Bonds Equities
Collapse of Lehman Brothers
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Capital flows: challenges
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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.
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Source: CBRT
Capital Flows and GDP Growth in Turkey
-8
-6
-4
-2
0
2
4
6
8
10
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Net Capital Flows/GDP GDP Growth Rate
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Capital flows: why bother now?
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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
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Emerging Market Currencies Against USD*
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Emerging Economies: Brazil, Chile, Colombia, Czech Republic, Hungary, Indonesia, Malaysia, Mexico, Philippines, Poland, Romania, South Africa, Korea.
0.75
0.85
0.95
1.05
1.15
1.25
1.35
010
5
050
5
090
5
010
6
050
6
090
6
010
7
050
7
090
7
010
8
050
8
090
8
010
9
050
9
090
9
011
0
051
0
091
0
011
1
051
1
091
1
20%-80% Interval of EMs
EM Average
Collapse of Lehman Brothers
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Source: EPFR, CBRT.
(Billion US dollars) 13-week moving average
Portfolio Flows: Turkey vs. Developing Countries
-3
-2
-1
0
1
2
3
4
5
6
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Turkey All developing countries (right axis)
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Capital Flows and Macro-Financial Risks: Turkish economy as of late 2010
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Main Sources of External Financing* (12-months Cumulative, Billion USD)
*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.
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 )
Source: TURKSTAT, CBRT.
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
4 1 2 3 4 1 2 3 4 1 2 3 4 1
2008 2009 2010 2011
CAB
CAB (excludingenergy)
-20
-10
0
10
20
30
40
50
60
70
80
200
7:0
9
200
7:1
1
200
8:0
1
200
8:0
3
200
8:0
5
200
8:0
7
200
8:0
9
200
8:1
1
200
9:0
1
200
9:0
3
200
9:0
5
200
9:0
7
200
9:0
9
200
9:1
1
201
0:0
1
201
0:0
3
201
0:0
5
201
0:0
7
201
0:0
9
201
0:1
1
201
1:0
1
Portfolio and Short-Term*
FDI and Long-Term**
Current Account Deficit
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Source: CBRT
-30
-15
0
15
30
45
60
No
v-0
8
Jan-0
9
Ma
r-0
9
Ma
y-0
9
Jul-0
9
Sep-0
9
No
v-0
9
Jan-1
0
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Total Loan Growth Rates (13 Weeks Moving Average,
Annualized, FX Adjusted, Percent)
Real Exchange Rate (2003=100)
Turkish Economy as of late-2010: Rapid Credit Growth, and Sharp Appreciation of Domestic Currency
100
105
110
115
120
125
130
135
03
09
04
09
05
09
06
09
07
09
08
09
09
09
10
09
11
09
12
09
01
10
02
10
03
10
04
10
05
10
06
10
07
10
08
10
09
10
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Searching for a new policy framework
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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.
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Can we do it with conventional Inflation Targeting?
15
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.
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The New Policy Framework
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Policy Framework
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Price Stability Price Stability
Financial Stability
Policy Rate
Interest Rate Corridor
Reserve Options
Policy Rate, etc…
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Financial Stability: How can Monetary Policy Contribute?
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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
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Transmission Mechanism
19
Macro prudential
Policy
Reserve
Requirement
Reserve Options
Policy Rate
Interest Rate
Policy
Liquidity Policy
Interest Rate Corridor
Funding Strategy
REFERENCE INDICATORS
Financial Stability
Price Stability
OBJECTIVES INSTRUMENTS
Credit Growth
Exchange Rate
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The link between credit, exchange rate, and final objectives
20
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.
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Have new instruments weakened the impact of capital flows to domestic macroeconomic variables?
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Source: CBRT.
Current Account and Capital Flows
Last Observation: February 2013.
-10
0
10
20
30
40
50
60
70
80
90
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
CAD Net Capital Inflows
Current Account Deficit and Net Capital Inflows (12 Month Cumulative, Billion USD)
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Volatility of the Turkish lira and other EM currencies against USD (30 days moving average)
0.1
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.90710
0910
1110
0111
0311
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
Other EM Currencies Turkish lira
New Policy
Instruments
* Countries with current account deficits are Brazil, Chile, Columbia, Czech Republic, Hungary, Indonesia, Mexico, Poland, Romania, South Africa, and Turkey.
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Source: CBRT.
Inflation Expectations
2
3
4
5
6
7
8
9
10
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
12 months
24 months
Adoption of New Policy Framework
Last Observation: May 2013.
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Macroeconomic Outcomes of the New Monetary Policy Framework
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Source: TURKSTAT, CBRT.
Gross Domestic Product and Private Final Domestic Demand (Seasonally Adjusted, 2003=100)
Last Observation: 2013Q1
Economic Activity
110
120
130
140
150
160
170
03
-05
09
-05
03
-06
09
-06
03
-07
09
-07
03
-08
09
-08
03
-09
09
-09
03
-10
09
-10
03
-11
09
-11
03
-12
09
-12
03
-13
GDP Private Final Domestic Demand
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80
90
100
110
120
130
140
REER 2 percent 1.5 percent
27
Source: CBRT.
CPI Based REER (Base year: 2003)
Real Exchange Rate
QE2 Policy Reaction - I
Policy Reaction - II
EZ Crisis
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Change in Credit Stock /GDP
28
* Forecast for 2012.
** 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..
0
2
4
6
8
10
12
14
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2*
Turkey
EM Average**
Policy Reaction
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Source: CBRT.
Credit and Current Account
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
200
8Q
1
200
8Q
2
200
8Q
3
200
8Q
4
200
9Q
1
200
9Q
2
200
9Q
3
200
9Q
4
201
0Q
1
201
0Q
2
201
0Q
3
201
0Q
4
201
1Q
1
201
1Q
2
201
1Q
3
201
1Q
4
201
2Q
1
201
2Q
2
201
2Q
3
201
2Q
4
Net Credit Use / GDP (%)
Current Account Deficit / GDP (%)
Net credit use is annual change in total credit stock.
Current account is in annual terms.
Net Credit Use and Current Account Deficit
(annual, percent of GDP)
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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.
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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