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TARGET2 Unlimited: monetary policy implications of asymmetric liquidity management within the Euro area. CEPS Policy Brief No. 248, 13 July 2011

Abad, José M. and Löffler , Axel and Zemanek, Holger. (2011) TARGET2 Unlimited: monetary policy implications of asymmetric liquidity management within the Euro area. CEPS Policy Brief No. 248, 13 July 2011. [Policy Paper]

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    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.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > EU institutions & developments > European Central Bank
    EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Policy Briefs
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 14 Jul 2011 07:59
    Number of Pages: 11
    Last Modified: 14 Jul 2011 07:59
    URI: http://aei.pitt.edu/id/eprint/32192

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