The Economics of Target Balances : From Lehman to Corona

"Though not initially expected or understood large movements in target balances at Eurozone Central Banks turned out to be a central essential feature of enabling the euro-system to survive a series of major shocks. In this beautifully and magisterially written book, Sinn describes clearly how this complex system has operated, and the several problems that this has entailed. An essential read for anyone interested in the workings of the euro-system." - Charles Goodhart, Emeritus Professor of Banking and Finance at the London School of Economics (LSE) "This excellent book, which deeply improves the understanding of the topic of Target balances, comes at a crucial moment in European history where due to the Corona-Crisis substantial reforms in the institutional organization of the Euro-Area and the EU will become necessary. It will help policy makers and academics when facing this enormous challenge. The book is rooted in theoretical economic principles and does not reflect a mere dogmatic or political view of the issue." - Frank Westermann, Professor of Economics and director of the Institute of Empirical Economic Research, Osnabrück University, Germany "This book is a must-read for anybody interested in the working and the problems of the eurosystem. The author analyses the developments which are reflected in a seemingly pure technical issue. Pervasive, stringent, just brilliant." - Otmar Issing, President of the Center for Financial Studies and former member of the ECB Executive Board (1998-2006) Target balances are the largest single item in some of the balance sheets of the Eurosystem's national central banks (NCBs), and yet very little is known about them by the general public and even by economists. This book shows that Target balances measure overdraft credits between the NCBs that resemble ordinary fiscal credit and which have grown disproportionately, exceeding one billion euros. There is, however, no parliamentary legitimation for the Target balances. The book sheds light on the economic significance of the balances, questions their limitlessness, and addresses controversial views that have been expressed regarding them. It uses the Target statistics to analyze the course of the euro crisis and the ECB's policy reactions from the time of the Lehman bankruptcy up to the outbreak of the Corona crisis. It analyses the credit risks involved for the Eurosystem and concludes with a reform proposal. This book will be of interest to non-specialist economists and policy makers Contents Abbreviations List of Figures List of Boxes Chapter 1: Target: An Obscure Aspect of the Eurosystem 1.1 The Meaning of Target Balances 1.2 Mirroring the Eurozone Crisis Chapter 2: The Target Credit 2.1 Why Target Balances Measure Credit 2.2 The Decision for Public International Credit Chapter 3: Current Account, Capital Movements and Target Balances 3.1 The Basic Accounting Identity 3.2 Similar Balances in Other Payment Systems Chapter 4: The Cash Balance 4.1 The Measuring and Meaning of Cash Balances 4.2 The IMF’s Methodology Chapter 5: How the Target Balances Came About: The First Phase of the Crisis 5.1 The Phases of the Crisis 5.2 Opening the Sluice Gates Chapter 6: The Case of Greece 6.1 The Public Credit for Greece 6.2 Bailing Out Foreign Investors 6.3 Sudden Stop, Capital Flight and Current Account Finance Chapter 7: External and Internal Money 7.1 Some Definitions and Identities 7.2 External Money Crowds Out Internal Money: The Case of Germany Chapter 8: The QE Program and the Target balances 8.1 A Liquidity Flood Named QE 8.2 The Great Debt Restructuring 8.3 The Example of Italy 8.4 Triangular Transactions with Investors Outside the Eurozone Chapter 9: The Effective Rate of Interest on Target Balances 9.1 Why the Interest Problem Is Relevant 9.2 Legal Provisions for Intra-Eurosystem Interest Payments 9.3 Pooling: A Comprehensive Way of Calculating Intra-Eurosystem Interest on Target and Cash Balances 9.4 Primary Seignorage, Secondary Seignorage and the Definition of the Marginal Effective Rate of Interest on Target and Cash Balances 9.5 The Interest Formula 9.6 The Currently Negative Rate of Interest on Target and Cash Balances 9.7 Compound Interest and the Transfer of Liquidity and Income Chapter 10: Interest Spreads and Tiering 10.1 The Interest-induced Shift of Liquidity, Interest Spreads and the Elasticity of Local Money Supply 10.2 Differentiating the Interest Rates by Way of Tiering 10.3 The Effective Marginal Rate of Interest with Non-uniform Policy Rates 10.4 A Lesson to be Learned Chapter 11: The Corona Crisis 11.1 The Pandemic Infects the World 11.2 The Initial Impact of the Crisis on the Target Balances 11.3 The Rescue Measures Chapter 12: The Risks of Target and Cash Balances 12.1 Target and Cash Balances were Built Up in Exchange for Goods and Assets 12.2 Exit Risks, Exemplified by the Case of Italy 12.3 Risks of a Euro Break-Up 12.4 Risks without Exits 12.5 The Blackmailing Potential of Target and Cash Balances and the Dutch Disease Chapter 13: Conclusions and Policy Recommendations 13.1 The Findings of This Book 13.2 The Pros and Cons of Target and Cash Balances 13.3 Reform Options References Statistical References Index "Though not initially expected or understood large movements in target balances at Eurozone Central Banks turned out to be a central essential feature of enabling the euro-system to survive a series of major shocks. In this beautifully and magisterially written book, Sinn describes clearly how this complex system has operated, and the several problems that this has entailed. An essential read for anyone interested in the workings of the euro-system." - Charles Goodhart, Emeritus Professor of Banking and Finance at the London School of Economics (LSE) "This excellent book, which deeply improves the understanding of the topic of Target balances, comes at a crucial moment in European history where due to the Corona-Crisis substantial reforms in the institutional organization of the Euro-Area and the EU will become necessary. It will help policy makers and academics when facing this enormous challenge. The book is rooted in theoretical economic principles and does not reflect a mere dogmatic or political view of the issue." - Frank Westermann, Professor of Economics and director of the Institute of Empirical Economic Research, Osnabrück University, Germany "This book is a must-read for anybody interested in the working and the problems of the eurosystem. The author analyses the developments which are reflected in a seemingly pure technical issue. Pervasive, stringent, just brilliant." - Otmar Issing, President of the Center for Financial Studies and former member of the ECB Executive Board (1998-2006) Target balances are the largest single item in some of the balance sheets of the Eurosystem's national central banks (NCBs), and yet very little is known about them by the general public and even by economists. This book shows that Target balances measure overdraft credits between the NCBs that resemble ordinary fiscal credit and which have grown disproportionately, exceeding one billion euros. There is, however, no parliamentary legitimation for the Target balances. The book sheds light on the economic significance of the balances, questions their limitlessness, and addresses controversial views that have been expressed regarding them. It uses the Target statistics to analyze the course of the euro crisis and the ECB's policy reactions from the time of the Lehman bankruptcy up to the outbreak of the Corona crisis. It analyses the credit risks involved for the Eurosystem and concludes with a reform proposal. This book will be of interest to non-specialist economists and policy makers "Target balances are the largest single item in some of the balance sheets of the Eurosystem's national central banks (NCBs), and yet very little is known about them by the general public and even by economists. This book shows that Target balances measure overdraft credits between the NCBs that resemble ordinary fiscal credit and which have grown disproportionately, exceeding one billion euros. There is, however, no parliamentary legitimation for the Target balances. The book sheds light on the economic significance of the balances, questions their limitlessness, and addresses controversial views that have been expressed regarding them. It uses the Target statistics to analyze the course of the euro crisis and the ECB's policy reactions from the time of the Lehman bankruptcy up to the outbreak of the Corona crisis. It analyses the credit risks involved for the Eurosystem and concludes with a reform proposal. This book will be of interest to non-specialist economists and policy makers."-- Provided by publisher