Target2 imbalances and poverty in the eurozone

Abstract

This paper aims to investigate the relationship between external imbalances and poverty in the Eurozone. The former are registered through the Target2 (T2) settlement mechanism and can be assimilated into changes in official reserves to cover the balance of payments disequilibrium in a fixed exchange rate regime. The presence of T2 discrepancies has led to differences in interest rates and increased distances in general living conditions inside the Eurozone. An empirical investigation implemented in 11 Eurozone countries reveals that T2 is negatively correlated with poverty, therefore allowing for an interpretation that approximates balance of payment crisis models. Results that appear to be robust to several control variables suggest that the policy framework of the Eurozone—in the absence of a compensatory mechanism—should be revised towards centralised fiscal instruments and anti-speculative monetary interventions.