Capital flows in the euro area and TARGET2 balances

Abstract

We estimate a panel VAR model for the euro area to quantitatively assess the contribution of the TARGET2 system to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries. Our results suggest that TARGET2 has significantly affected the transmission of capital flow shocks while leaving the macroeconomic responses to other aggregate shocks virtually unaltered. Furthermore, on basis of counterfactual analyses, we find that TARGET2 has contributed substantially to avoid deeper recessions in distressed periphery member countries like Spain, Italy, Ireland and Portugal, while to a smaller degree depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.

What Drives the German Target Balances? Evidence from a Bvar Approach

“…These findings correspond to the results of Hristov et al (2020) who also identify capital flows as the driving forces of TARGET balances between 2008 and 2014. Specifically, we agree with the authors that the dynamics of TARGET balances reflect asymmetric liquidity needs in euro area member countries in times of elevated risk.…”

“…Fagan and McNelis (2014) show in a framework of a DSGE model the TARGET financing system helps in mitigating the adverse effects of a sudden stop on output, consumption and investment. Hristov, Hülsewig, and Wollmershäuser (2020) study the developments of the TARGET balances between the onset of the 2008 financial crisis until 2014. They conclude that developments of the TARGET balances can be explained by capital flow shocks, rather than cyclical factors.…”

Safe haven flows, natural interest rates and secular stagnation—Empirical evidence for Euro area countries

“…First, the TARGET2-balances of the Eurosystem have to be acknowledged (Hristov et al, 2019). We observed substantial inter-country divergence in this measure, so some countries nowadays have large surpluses while others have decits.…”

“…One of them are international capital ows between the Euro area member countries. This can be seen, for instance, by changes in the balances of the ECB TARGET2-system where assets and liabilities rose substantially in many countries of the EMU (Sinn and Wollmershäuser, 2012;Hristov et al, 2019).…”

Lessons from TARGET2 Imbalances: the Case for the ECB Being a Lender of Last Resort

“…Commercial banks' demand for NCBs' liquidity loans was steadily falling. As a result TARGET2 imbalances started to shrink (Hristov, Hülsewig, & Wollmershäuser, 2018). They rebounded again in March 2015 after the launch of ECB's quantitative easing (QE).…”