​Wednesday
12.2.2014
at 10:30
 
Prof. Paul McNelis (Fordham University, USA): TARGET balances and macroeconomic adjustment to sudden stops in the euro area

co-authored by Gabriel Fagan (Trinity College and ECB)


Abstract
This paper examines how membership of a monetary union affects macroeonomic adjustment of Euro Area countries to sudden stops. We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common central bank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bank financing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates the collapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However, a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates the tendency towards overborrowing, leading to an increased incidence of sudden stop episodes.
 
 
 
BOFIT seminars
The seminars are open to all economists interested in the subject areas covered.
You need to pre-register for the seminar with
Ms Liisa Mannila (firstname.lastname@bof.fi, phone +358 10 831 2268).

Seminar will be held at Rauhankatu 19, 3rd floor seminar room (arrive at the Bank's Rauhankatu 19 entrance, from where you will be escorted to the BOFIT seminar room).

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