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Capital flows in the euro area and TARGET2 balances

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  • Hristov, Nikolay
  • Huelsewig, Oliver
  • Wollmershaeuser, Timo

Abstract

This paper explores how the uneven recourse by national banking systems in the euro area to the ECB's unconventional refinancing operations that led to the accumulation of large TARGET2 balances at the NCBs has contributed to the evolution of aggregate economic activity in important member states of the euro area. For the period between 2008 and 2014 we estimate a panel VAR model and identify the structural shocks by means of sign restrictions. Our results suggest that the build-up of TARGET2 balances was driven mainly by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on the basis of counterfactual experiments we find that the ability to build up sizeable TARGET2 liabilities has contributed substantially to avoiding deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states such as Germany, the Netherlands and Finland.

Suggested Citation

  • Hristov, Nikolay & Huelsewig, Oliver & Wollmershaeuser, Timo, 2020. "Capital flows in the euro area and TARGET2 balances," Munich Reprints in Economics 84737, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:84737
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    3. Giovannini, Alessandro & Ioannou, Demosthenes & Stracca, Livio, 2022. "Public and private risk sharing: friends or foes? The interplay between different forms of risk sharing," Occasional Paper Series 295, European Central Bank.
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    5. Krahnen, Jan Pieter, 2018. "Über Scheinriesen: Was TARGET-Salden tatsächlich bedeuten. Eine finanzökonomische Überprüfung," SAFE White Paper Series 56, Leibniz Institute for Financial Research SAFE.
    6. Chmielewski Tomasz & Sławiński Andrzej, 2019. "Lessons from TARGET2 imbalances: The case for the ECB being a lender of last resort," Economics and Business Review, Sciendo, vol. 5(2), pages 48-63, June.
    7. Bettendorf, Timo & Jochem, Axel, 2021. "What drives the German TARGET balances? Evidence from a BVAR approach," Discussion Papers 12/2021, Deutsche Bundesbank.

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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