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What Drives Target2 Balances? Evidence From a Panel Analysis

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  • Raphael Anton Auer

Abstract

What are the drivers of the large Target2 (T2) balances that have emerged in the European Monetary Union since the start of the financial crisis in 2007? This paper examines the extent to which the evolution of national T2 balances can be statistically associated with cross-border financial flows and current account (CA) balances. In a quarterly panel spanning the years 1999 to 2012 and twelve countries, it is shown that while the CA and the evolution of T2 balances were unrelated until the start of the 2007 financial crisis, since then, the relation between these two variables has become statistically significant and economically sizeable. This reflects the partial "sudden stop" to private sector capital that funded CA imbalances beforehand. I next examine how different types of financial flows have evolved over the last years and how this can be related to the evolution of T2 balances. While changes in cross-border positions in the interbank market are associated with increasing T2 imbalances, cross-border inter-office flows between banks belonging to the same financial institution have reduced T2 imbalances. Flows to the banking sector that originate from private investors and non-financial firms are large in magnitude, but are only weakly correlated with the evolution of T2 balances; changes in banks' holdings of foreign government debt and deposit flows are strongly correlated with the post-2007 evolution of T2 balances. Overall, these findings point to a sizeable transfer of risk from the private to the public sector within T2 creditor nations the via the use of central bank liquidity.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-15.

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Length: 40 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-15

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Keywords: European Monetary Union; Euro; fiscal divergence; current account imbalances; TARGET2; central bank balance sheet; financial crisis; payment system;

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References

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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  2. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
  3. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters, in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
  4. Helmut Schlesinger, 2011. "Die Zahlungsbilanz sagt es uns," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 64(16), pages 09-11, 09.
  5. Stefan Homburg, 2011. "Anmerkungen zum Target2-Streit," Wirtschaftsdienst, Springer, vol. 91(8), pages 526-530, August.
  6. Dinger, Valeriya & Steinkamp, Sven & Westermann, Frank, 2012. "The Tragedy of the Commons and Inflation Bias in the Euro Area," Working Papers 94, Institute of Empirical Economic Research.
  7. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer, vol. 19(4), pages 468-508, August.
  8. Ulrich Bindseil & Philippine Cour-Thimann & Philipp König, 2012. "Target2 and Cross-border Interbank Payments during the Financial Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(SPECIALIS), pages 83-92, 02.
  9. Maria Milesi-Ferretti, Gian & Razin, Assaf, 1998. "Sharp reductions in current account deficits An empirical analysis," European Economic Review, Elsevier, vol. 42(3-5), pages 897-908, May.
  10. Martin Handig & Robert Holzfeind & Clemens Jobst, 2012. "Understanding TARGET 2: The Eurosystem’s Euro Payment System from an Economic and Balance Sheet Perspective," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 81–91.
  11. Jens Ulbrich & Alexander Lipponer, 2012. "Balances in the Target2 Payments System – A Problem?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(SPECIALIS), pages 73-76, 02.
  12. repec:kuk:journl:v:45:y:2012:i:2:p:135-174 is not listed on IDEAS
  13. Peter M. Garber, 1998. "Notes on the Role of TARGET in a Stage III Crisis," NBER Working Papers 6619, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sergio Cesaratto, 2013. "The implications of TARGET2 in the European balance of payment crisis and beyond," Department of Economics University of Siena 681, Department of Economics, University of Siena.
  2. Philip R. Lane, 2013. "Growth and Adjustment Challenge for the Euro Area," The Institute for International Integration Studies Discussion Paper Series iiisdp427, IIIS.
  3. Philip R. Lane, 2014. "International Financial Flows and the Irish Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 15(2), pages 14-19, 04.
  4. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target Balances and the German Financial Account in Light of the European Balance-of-Payments Crisis," CESifo Working Paper Series 4051, CESifo Group Munich.
  5. Astarita, Caterina & Purificato, Francesco, 2013. "TARGET2 imbalances and the need for a lender of last resort," MPRA Paper 51124, University Library of Munich, Germany.
  6. Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.
  7. Philip R. Lane, 2014. "International Financial Flows and the Irish Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp444, IIIS.
  8. Philippine Cour-Thimann, 2013. "CESifo Forum Special Issue April 2013: Target Balances and the Crisis in the Euro Area," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 0, pages 05-50, 05.

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