The Turkish Approach to Capital Flow Volatility

The shock waves of the 2008-09 global financial crisis and the 2011-12 Eurozone debt crisis hit emerging markets from the trade, the finance and the expectations channels. We focus on the finance channel in this paper. We first discuss the challenges arising from capital flow volatility in emerging economies in general. We then focus on the Turkish approach and describe in detail the new policy mix implemented by the Central Bank of the Republic of Turkey during the 2008-2012 period and the results obtained. This approach differs from others in its emphasis on the use of macroprudential policy measures rather than capital flow measures for improving domestic financial stability in face of volatile capital flows.