Financial stability and monetary policy

Financial stability and monetary policy. Turkish economy in the aftermath of the global crisis has faced an unprecedented divergence between domestic and external demand Increasing risks in the face of surging short-term capital inflows, deteriorating current account deficit and rapid credit growth have called for an alternative policy approach. In order to limit the buildup of macro-financial imbalances, the Central Bank of Turkey (CBT) has designed and implemented a new policy mix by utilizing several complementary instruments. This study assesses the new policy strategy designed and implemented by the CBT. First we introduce the main structure of the new policy and explain why and for what purpose each instrument is used. We then elaborate on the communication strategy and assess the initial impact of the implementation. Although it is too early to draw firm conclusions, initial results so far suggest that a policy mix of lower policy rate, a wider interest rate corridor, combined with higher required reserve ratios may serve as all appropriate strategy in dealing with short term capital inflows, especially in countries with current account deficits.