TARGET2 imbalances and the need for a lender of last resort

Astarita, Caterina and Purificato, Francesco (2013): TARGET2 imbalances and the need for a lender of last resort.

Abstract

This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis. The development of these balances reflects the change in the distribution of the monetary base among the EMU Member States. During the sovereign debt crisis, while some countries, among which Germany, registered a decisive inflow of monetary base, some others, as Italy, shown an outflow. The main conclusion of the paper is that the dynamics in TARGET2 is rather due to a fall in the level of confidence in the capacity of the EMU to survive than to disparities in the level of competitiveness among countries of the Eurozone as a part of the literature maintained. In turn, this crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions of creating a mechanism working as “lender of last resort” for the Eurozone Member States. Two elements, in particular, support this thesis. On the one hand, most of the monetary base outflow occurred in coincidence with those political decisions which determined deterioration in the expectation about the degree of solvency of the periphery countries. On the other hand, the fiscal consolidation that the periphery countries implemented destabilized the economy as a result of a negative conjuncture and a monetary policy ineffective in reducing the interest rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: payment system, monetary policy, fiscal policy, financial crisis
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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