Well the debate over Target2 balances has been off the radar for a while now. However, the quest to figure the balances and other details remains with this blog. It was just an amazing learning to know abt the monetary flows in Euroarea.
A nice paper by Bank of Italy econs on basics of Target2 balances. They also say the same thing. Target 2 balances rose as a response to drying up of interbank market in Euroarea. Barring Greece
The paper analyzes developments in TARGET2 imbalances within the euro area since 2007, from two perspectives: national central banks’ balance sheets and countries’ balance of payments (BoP). We examine the relationship between TARGET2 balances and the Eurosystem liquidity provision, analyzing how the circulation of the latter has changed during the crisis. We then study BoP developments in Greece, Portugal, Italy and Spain, investigating which of the following explanations accounts for the growing TARGET2 imbalances: (i) current account deficit, (ii) decrease of net inflows of private capital from securities and interbank markets and (iii) run on deposits.
The results of our analysis suggest that while the increase in TARGET2 liabilities is related to the current account deficit in Greece, there is no evidence of this in Italy, Spain and Portugal. In all countries the increase is mostly driven by private capital outflows in securities and interbank markets; deposit runs are apparent only in Greece. In Italy, the reduction of capital inflows consisted entirely in a decrease in the interbank market cross-border activity and in portfolio investments by non-residents.
Nice read..
October 17, 2012 at 12:18 pm |
Nice read?
A correlation analysis explaining Target balances via components of the balance-of-payments is not very smart. Just as correlation is not causation one can also say causation does not imply correlation.
Since Target2 is by accounting identity the balance-of-payments with the rest of the Euro area one can directly calculate what share is due to the different components.
HWS often describes this by an analogy of a car with two different fuels between which can be switched. After you arrived at your destination you can of course say which fuel contributed for certain number of kilometers but on your way the fuel alternatives do not have to be correlated with the driven kilometers.