"New" monetary policy instruments and exchange rate volatility

Turkish economy has been suffering from rises in financial flows in the last two decades since these flows have raised financial stability challenges across emerging economies including Turkey. Regarding the ability of the central banks to decrease the financial risks including volatile exchange rate, the Central Bank of the Republic of Turkey has designed and implemented a new policy mix. In this study, we investigate the effect of new policy instruments (IRC, RRR and ROM) on the volatilities of US dollar, euro, British pound and basket rate for the Turkish economy between January 2, 2002 and December 9, 2014 by using ARMA-GARCH, ARMA-EGARCH and SWARCH models. From the estimation results, we can not reach enough evidence that the IRC and RRR instruments could decrease the volatilities of exchange rates under investigation while the ROM instrument was successful, especially on the US dollar and basket rate. We also find strong evidence in favour of asymmetric volatility, indicating that the positive shocks led to greater exchange rate volatility than negative ones.