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

CEPS Policy Brief No. 248

11 Pages Posted: 31 Jul 2011

See all articles by José M. Abad

José M. Abad

affiliation not provided to SSRN

Axel Loeffler

Deutsche Bundesbank

Holger Zemanek

University of Leipzig - Institute for Economic Policy

Date Written: July 13, 2011

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 the 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 their implications for absorbing 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; and 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: euro, euro area, bank, credit, TARGET2, monetary policy, central bank, liquidity, investment, overinvestment

Suggested Citation

Abad, José M. and Loeffler, Axel and Zemanek, Holger, TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area (July 13, 2011). CEPS Policy Brief No. 248, Available at SSRN: https://ssrn.com/abstract=1898658

José M. Abad

affiliation not provided to SSRN

Axel Loeffler

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Straße 14
Frankfurt am Main, 60431
Germany
+49 69 9566 2966 (Phone)

HOME PAGE: http://www.bundesbank.de

Holger Zemanek (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Strasse 12
Leipzig, 40109
Germany

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