TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area

José M Abad, Axel Loeffler and Holger Zemanek

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: TARGET2 balances; monetary policy; euro area; Eurosystem; excess liquidity (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 F32 F36 (search for similar items in EconPapers)
Date: 2011-07-02
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/31937/1/MPRA_paper_31937.pdf original version (application/pdf)

Related works:
Working Paper: TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:31937

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().