TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area
This paper analyses the implications of a continued divergence of TARGET2 balances for monetary policy in the euro area. The accumulation of TARGET2 claims (liabilities) would make ECB’s liquidity management asymmetric once the TARGET2 claims in core countries have crowded out central bank credit in those regions. Then while providing scarce liquidity to banks in countries with TARGET2 liabilities, the ECB will need to absorb excess liquidity in countries with TARGET2 claims. We discuss three alternatives and its implications to absorb excess liquidity in core regions: (1) Using market based measures might accelerate the capital flight from periphery to core countries and would add to the accumulation of risky assets by the ECB. (2) Conducting non-market based measures such as imposing differential (unremunerated) reserve requirements would distort banking markets and would support the development of shadow banking. (3) Staying passive would lead to decreasing interest rates in core Europe entailing inflationary pressure and overinvestment in those regions and possibly future instability of the banking system.
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- 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.
- Hans-Werner Sinn & Timo Wollmershaeuser, 2011.
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- Hans-Werner Sinn & Timo Wollmershäuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility," CESifo Working Paper Series 3500, CESifo Group Munich.
- 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.
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