Advanced Search
MyIDEAS: Login

What Drives Target2 Balances? Evidence From a Panel Analysis

Contents:

Author Info

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 private capital 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 “sudden stop” to private sector capital that funded CA imbalances beforehand. I next examine how different types of private capital flows have evolved over the last years and how this can be related to the evolution of T2 balances, finding some deposit flight by private customers, a substantial retrenchment of cross-border interbank lending, and also an increase of bank’s holdings of high-quality sovereign debt. My first conclusion from this analysis is that since T2 imbalances were caused by a sudden stop and are unlikely to grow without bounds since Euro area CA imbalances are currently diminishing at a rapid pace, there is no evidence that the institutional setup of the European Monetary Union needs to be reformed fundamentally. My second conclusion relates to how the current system transfers risks across the currency union, both in terms of risk transfer from T2 debtor to T2 creditor nations and in terms of risk transfer from the private sector to the public sector within T2 creditor nations. I evaluate existing reform proposals in the light of these risk transfers.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.szgerzensee.ch/fileadmin/Dateien_Anwender/Dokumente/working_papers/wp-1303.pdf
File Function: Full text
Download Restriction: None

Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 13.03.

as in new window
Length: 45 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:szg:worpap:1303

Contact details of provider:
Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee
Phone: ++41 (0)31 780 31 31
Fax: ++41 (0)31 780 31 00
Email:
Web page: http://www.szgerzensee.ch/

Order Information:
Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee
Email:

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. 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.
  2. Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
  3. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
  4. 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.
  5. 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.
  6. 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.
  7. Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2014. "The Tragedy of the Commons and Inflation Bias in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 71-91, February.
  8. 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.
  9. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
  10. Stefan Homburg, 2011. "Anmerkungen zum Target2-Streit," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 64(16), pages 46-50, 09.
  11. Gian Maria Milesi-Ferrett & Assaf Razin, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Working Papers 6620, National Bureau of Economic Research, Inc.
  12. 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.
  13. repec:kuk:journl:v:45:y:2012:i:2:p:135-174 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. Philip R. Lane, 2013. "Growth And Adjustment Challenges For The Euro Area," The Economic and Social Review, Economic and Social Studies, vol. 44(2), pages 273-295.
  3. Sergio Cesaratto, 2013. "The implications of TARGET2 in the European balance of payments crisis and beyond," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 10(3), pages 359—.
  4. 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.
  5. Philip R. Lane, 2014. "International Financial Flows and the Irish Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp444, IIIS.
  6. Astarita, Caterina & Purificato, Francesco, 2013. "TARGET2 imbalances and the need for a lender of last resort," MPRA Paper 51124, University Library of Munich, Germany.
  7. Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.
  8. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:szg:worpap:1303. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (library).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.