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Fiscal divergence, current account and TARGET2 imbalances in the EMU

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  • Abad, José
  • Löffler, Axel
  • Schnabl, Gunther
  • Zemanek, Holger

Abstract

The paper scrutinizes the reasons for the European debt crisis, the implications for TARGET2 imbalances and options for surplus liquidity absorption within an asymmetric EMU. It is argued that starting from the turn of the millennium diverging fiscal policy paths and diverging unit labour costs were the driving force of rising intra-European current account imbalances within the euro area, which were enhanced by post-2001 low interest rate policies and changing financing conditions for the German banking sector. The paper shows how since the outbreak of the crisis the adjustment of intra-EMU current account imbalances is postponed by a rising divergence of TARGET2 balances, as the repatriation of private international credit and deposit flight from the crisis economies is substituted by central bank credit. Given that this process has brought Deutsche Bundesbank into a debtor position to the domestic financial system, we discuss options for liquidity absorption by Deutsche Bundesbank to forestall asset price bubbles in Germany. --

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Bibliographic Info

Paper provided by University of Leipzig, Faculty of Economics and Management Science in its series Working Papers with number 105.

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Date of creation: 2012
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Handle: RePEc:zbw:leiwps:105

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Related research

Keywords: EMU; fiscal divergence; TARGET2; current account imbalances;

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References

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  1. Sinn, Hans-Werner & Wollmershäuser, Timo, 2012. "Target loans, current account balances and capital flows: The ECB’s rescue facility," Munich Reprints in Economics 19556, University of Munich, Department of Economics.
  2. Abad, José M & Loeffler, Axel & Zemanek, Holger, 2011. "TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area," MPRA Paper 31937, University Library of Munich, Germany.
  3. Vasco Curdia & Michael Woodford, 2010. "The Central Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-16, Columbia University, Department of Economics.
  4. Axel Löffler & Gunther Schnabl & Franziska Schobert, 2010. "Inflation Targeting by Debtor Central Banks in Emerging Market Economies," CESifo Working Paper Series 3138, CESifo Group Munich.
  5. Gunther Schnabl & Holger Zemanek, 2010. "Inter-temporal Savings, Current Account Dynamics and Asymmetric Shocks in a Heterogeneous European Monetary Union," CESifo Working Paper Series 3279, CESifo Group Munich.
  6. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
  7. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  8. Helge Berger & Volker Nitsch, 2010. "The Euro’s Effecton Trade Imbalances," IMF Working Papers 10/226, International Monetary Fund.
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Cited by:
  1. Gunther Schnabl, 2012. "Die japanischen Lehren für die europäische Krise," Global Financial Markets Working Paper Series 2012-36, Friedrich-Schiller-University Jena.
  2. Gunther Schnabl, 2013. "The Macroeconomic Policy Challenges of Balance Sheet Recession: Lessons from Japan for the European Crisis," CESifo Working Paper Series 4249, CESifo Group Munich.

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