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A further view on current account, capital account and Target2 balances: Assessing the effect on capital structure and economic welfare

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  • Sell, Friedrich L.
  • Sauer, Beate

Abstract

In this paper, we first present the state and the development of the European capital and current account imbalances. We demonstrate how large the heterogeneity among European countries is and that clustering here different types of countries is possible, but that it leads to different groupings than what has been labeled the PIGS or better GIPS countries on the one side and the GLNF countries on the other side. The same applies when it comes to cluster countries according to the debt ratio criterion. Hereafter, we put forward our own description of the mentioned ECB implicit financing scheme(s), among other things extending and complementing the recent base money market (supply and demand) analysis given by H.-W. Sinn and T. Wollmershäuser (2011). The core of the paper consists in a modified model of the New Austrian School of Economics - in the tradition of F. A. v. Hayek (1929, 1931) and in the vein of R. M. Garrison (2002) - which enables us to discuss the current distortions introduced by the Target2 credit channel into the capital markets of selected EMU countries and to detect its most important economic consequences. This part of the paper ends with a static welfare evaluation. Finally, we come up with some conclusions and suggestions for economic policy.

Suggested Citation

  • Sell, Friedrich L. & Sauer, Beate, 2011. "A further view on current account, capital account and Target2 balances: Assessing the effect on capital structure and economic welfare," Working Papers in Economics 2011,2, Bundeswehr University Munich, Economic Research Group.
  • Handle: RePEc:zbw:ubwwpe:20112
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    References listed on IDEAS

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    1. 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.
    2. Hans-Werner Sinn, 2011. "Target-Salden, Außenhandel und Geldschöpfung," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 64(09), pages 23-25, May.
    3. 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;International Institute of Public Finance, pages 468-508.
    4. Van Marrewijk, Charles, 2012. "International Economics," OUP Catalogue, Oxford University Press, edition 2, number 9780199567096.
    5. Abad, José M. & Löffler, Axel & Zemanek, Holger, 2011. "TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area," CEPS Papers 5904, Centre for European Policy Studies.
    6. Hans-Werner Sinn, 2010. "Rescuing Europe," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(SPECIALIS), pages 1-22, August.
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    Citations

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    Cited by:

    1. Beate Sauer & Friedrich Sell & Thomas Werner, 2014. "Modelling the Eurozone as an Extraordinary Exchange Rate Union," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(4), pages 357-367, November.
    2. Friedrich L. Sell & Beate Sauer, 2012. "Money, Capital Markets and Welfare: An Analysis of the Effects of Target2 Balances," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(SPECIALIS), pages 55-62, February.
    3. Friedrich L. Sell & Beate Sauer, 2011. "Geld-, Kapitalmärkte und Wohlfahrt: Eine Wirkungsanalyse der Target2-Salden," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 64(16), pages 51-57, September.
    4. repec:kap:iaecre:v:20:y:2014:i:4:p:357-367 is not listed on IDEAS
    5. Sauer, Beate & Sell, Friedrich L., 2013. "Is the Eurozone not a monetary union, but an extraordinary exchange rate union?," Working Papers in Economics 2013,2, Bundeswehr University Munich, Economic Research Group.

    More about this item

    Keywords

    Target2 balances; current account deficits; ECB monetary policy; New Austrian Economics;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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