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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
31

Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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Page 1: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 2: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

2

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

Page 3: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Monetary Policy Since 2001

3

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)

Page 4: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

4

Capital Flows and Implications for Monetary Policy

Page 5: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

5

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

Page 6: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Capital flows: challenges

6

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.

Page 7: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

7

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

Page 8: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Capital flows: why bother now?

8

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

Page 9: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Emerging Market Currencies Against USD*

9

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

Page 10: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

10

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)

Page 11: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

11

Capital Flows and Macro-Financial Risks: Turkish economy as of late 2010

Page 12: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 13: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 14: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Searching for a new policy framework

14

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.

Page 15: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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.

Page 16: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

16

The New Policy Framework

Page 17: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Policy Framework

17

Price Stability Price Stability

Financial Stability

Policy Rate

Interest Rate Corridor

Reserve Options

Policy Rate, etc…

Page 18: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

Financial Stability: How can Monetary Policy Contribute?

18

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

Page 19: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 20: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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.

Page 21: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

21

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

Page 22: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

22

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)

Page 23: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

23

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.

Page 24: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

24

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.

Page 25: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

25

Macroeconomic Outcomes of the New Monetary Policy Framework

Page 26: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

26

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

Page 27: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 28: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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

Page 29: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

29

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)

Page 30: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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.

Page 31: Capital Flows, Financial Stability, and Monetary Policyunstats.un.org/unsd/nationalaccount/workshops/2013/...Capital Flows, Financial Stability, and Monetary Policy S. Tolga Tiryaki

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