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CESifo Working Paper Details

Explosive Target Balances

Niklas Potrafke (Website), Markus Reischmann

CESifo Working Paper No. 4297 (June 2013)

Primary CESifo Category: [1] Public Finance

Using the new unit root test by Phillips et al. (2011) we show that the Target balances of the German Bundesbank have been exploding from the beginning of 2009 to the beginning of 2013. By implementing a full-allotment policy and reducing the required minimum quality of collaterals in October 2008, the European Central Bank (ECB) refinanced credits in the GIIPS countries to a large extent. Private capital flowed out of the GIIPS countries (Greece, Italy, Ireland, Portugal and Spain), and the Target claims of the German Bundesbank increased significantly. If the Eurozone collapses, the German Bundesbank would lose its Target claims. Because the German Bundesbank would certainly request a recapitalization from the German federal government, German government debt might increase.

Keywords: Eurosystem, Target, recursive unit root test, explosiveness, hidden debt

JEL Classification:
[C220] Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
[E500] Monetary Policy, Central Banking, and the Supply of Money and Credit: General
[E580] Central Banks and Their Policies
[F320] Current Account Adjustment; Short-term Capital Movements
[F340] International Lending and Debt Problems
[H630] National Debt; Debt Management; Sovereign Debt

Additional CESifo Category:
[7] Monetary Policy and International Finance

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