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TARGET2 imbalances and the need for a lender of last resort

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  • Astarita, Caterina
  • Purificato, Francesco

Abstract

This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis. The development of these balances reflects the change in the distribution of the monetary base among the EMU Member States. During the sovereign debt crisis, while some countries, among which Germany, registered a decisive inflow of monetary base, some others, as Italy, shown an outflow. The main conclusion of the paper is that the dynamics in TARGET2 is rather due to a fall in the level of confidence in the capacity of the EMU to survive than to disparities in the level of competitiveness among countries of the Eurozone as a part of the literature maintained. In turn, this crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions of creating a mechanism working as “lender of last resort” for the Eurozone Member States. Two elements, in particular, support this thesis. On the one hand, most of the monetary base outflow occurred in coincidence with those political decisions which determined deterioration in the expectation about the degree of solvency of the periphery countries. On the other hand, the fiscal consolidation that the periphery countries implemented destabilized the economy as a result of a negative conjuncture and a monetary policy ineffective in reducing the interest rate.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51124.

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Date of creation: Oct 2013
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Handle: RePEc:pra:mprapa:51124

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Keywords: payment system; monetary policy; fiscal policy; financial crisis;

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  1. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  2. Raphael A. Auer, 2013. "What Drives Target2 Balances? Evidence from a Panel Analysis," CESifo Working Paper Series 4216, CESifo Group Munich.
  3. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  4. Carlo Panico & Francesco Purificato, 2013. "Policy coordination, conflicting national interests and the European debt crisis," Cambridge Journal of Economics, Oxford University Press, vol. 37(3), pages 585-608.
  5. Buiter, Willem H. & Rahbari, Ebrahim, 2012. "Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem," CEPR Discussion Papers 9211, C.E.P.R. Discussion Papers.
  6. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
  7. Martina Cecioni & Giuseppe Ferrero, 2012. "Determinants of TARGET2 imbalances," Questioni di Economia e Finanza (Occasional Papers) 136, Bank of Italy, Economic Research and International Relations Area.
  8. Alan J. Auerbach & Yuriy Gorodnichenko, 2011. "Fiscal Multipliers in Recession and Expansion," NBER Working Papers 17447, National Bureau of Economic Research, Inc.
  9. Philip Arestis, 2012. "Fiscal policy: a strong macroeconomic role," Review of Keynesian Economics, Edward Elgar, vol. 1(0), pages 93-108.
  10. Jocelyn Boussard & Francisco de Castro & Matteo Salto, 2012. "Fiscal Multipliers and Public Debt Dynamics in Consolidations," European Economy - Economic Papers 460, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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