Interpreting TARGET balances in the European Monetary Union: a critical review of the literature

This is a review article focusing on the most important studies on the role displayed by TARGET balances in the European Monetary Union (EMU). In the context of the public debt financial crisis, large TARGET balances became crucial, reflecting funding stress in the banking systems of most crisis-hit countries. The increase in TARGET balances in this period was triggered by a replacement in these countries of private sector funding of banks by central bank funding. By contrast, the more recent increases in TARGET balances are largely attributable to the implementation of the expanded asset purchase program (EAPP) by the European Central Bank (ECB), also known as a quantitative easing (Qe) monetary policy. Nevertheless, we argue that the persistency of extremely large TARGET imbalances continues to be understood by financial markets as a signal of macroeconomic distress, which should be addressed to solve the underlying tensions among EMU member States.