Do TARGET Balances Determine the Macroprudential Policy Effects?

Abstract

The cross-border payment transactions between countries of the Eurosystem originate the TARGET balances of the national central banks vis-a-vis the European Central Bank. This payment platform contributes to financial integration in the Euro Area, what brings numerous advantages for the national and worldwide economies. However, it also entails the risk of fast crisis contagion and widespread economic and financial destabilization. Thus, there is an important role for macroprudential policy in this context, to ensure a sustainable and stable financial integration. But the stabilization properties and spillovers of macroprudential regulation vary across countries. Using a two-country new Keynesian model for a monetary union I find that the international financial positions of the economies might determine the macroprudential policy effects after a symmetric financial shock.