Central Banking, Organizational Learning and Governance of Financial Stability Policy: An Agency-Based and Process-Oriented Analysis

Global Financial Crisis (GFC) has created more volatility, risk and uncertainty in international financial markets. As a result of these developments, “financial stability” emerged as one of the key pillars of economic policy making in both developing and developed economies. In spite of the acceptance and prominence of financial stability goal, we know very little about the financial stability policy formulation and implementation processes, mechanisms of institutional change and the role of agency to foster financial stability in national contexts. This study aims to fill this gap by revealing the mechanisms of financial stability policy making in a developing economy. In Turkey, authorities have taken a proactive stance since the GFC to sustain financial stability in the economy. In 2010 Central Bank of Republic of Turkey (CBRT) announced that it would actively follow “financial stability” objective and introduced new experimental, unconventional instruments (interest rate corridor and reserve option mechanism) in this respect. In 2011, Financial Stability Committee (FSC) was established to coordinate the activities of regulatory agencies and to take necessary measures against financial stability risks in the Turkish economy. This study argues that institutional entrepreneurship of CBRT as an organization and the Governor of CBRT as an individual paved the way for realization of financial stability policy in Turkey by accomplishing “organizational learning” at the CBRT and maintaining a close relationship with the Turkish Treasury by taking their political support in design of financial stability measures. This study utilizes an eclectic, interdisciplinary approach benefiting mainly from institutional theory, public policy and organization theory literature to bring an agency level (both organizational and individual) and process-oriented explanation to the changing role of central banking in shaping economic policy.