What is the Real Effective Exchange Rate Index?

NOMINAL EFFECTIVE EXCHANGE RATE

The nominal effective exchange rate expresses the weighted average value of the Turkish lira against this basket, according to a mixed basket of currencies of countries that have a significant share in Turkey's foreign trade. Weights are determined using bilateral trade flows. It is known that it contains information about the relative price or cost development between countries, and therefore it is accepted as one of the key macroeconomic indicators used in the evaluation of the competitiveness of economies.

REAL EFFECTIVE EXCHANGE RATE

The real effective exchange rate can be obtained by adjusting for the relative price effects in the nominal effective exchange rate. In other words; It is the nominal effective exchange rate adjusted for relative price or cost differences between countries. The real effective exchange rate is calculated over the nominal effective exchange rate using three different correction tools: CPI, PPI and unit labor cost.

What is the required response?

Required reserves are the name given to the legally determined ratio of deposits that accepting banks must keep at the central bank corresponding to these deposits. Required reserve ratios can also be used as a monetary policy tool for central banks. The amount of money in the market is adjusted with these rates and it is known that banks directly affect the credit base.

In other words, it is the deposit rate that banks must keep at the CBRT in return for the deposits they collect. Existing banks collecting deposits are required to keep the amount corresponding to a certain percentage of the deposits they collect at the Central Bank, which is a legal requirement. All domestic and foreign banks operating in Turkey are subject to this application. The provision rate may vary depending on the deposit maturity and currency. The Central Bank may pay interest according to the required reserve amounts of the banks, or it may not give any interest to the banks.

The "required reserve ratio" application was started mainly to ensure a healthier functioning of a collateral-like structure in the banking system, and it is known that today it has become an important monetary policy tool that Central Banks provide for liquidity control. For example, raising the reserve requirement ratios causes a decrease in the credit resources of the banks, thus reducing the money supply. This means that it is possible to make monetary tightening or relaxation by changing the reserve requirement ratios.

 

You can find detailed information about the 'required reserve ratio' and explanations of other financial terms in our Finance article category at Coinpara Academy.

 

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