Identifying Target 2 Determinants in the Long Run: Strength and Limits of Balance of Payments Accounting Identities

Abstract

Target2 (T2) balances in the Eurozone are again in a divergent trend after the pandemic shock. The recent financial literature seems to have reached a consensus about the need to characterize such phenomena under specific monetary policy configurations variable in time. T2 balances can be decomposed by using the balance of payments (BoP) identities. Indeed, proving a strong causality link from data that have to fulfill an accounting identity can be challenging, since the closer the data are to an accounting identity, the less information on causal relation can be inferred from econometric techniques. Nevertheless we believe that useful information can be extracted from the analysis of accounting correspondences. In this perspective, both long-term and short-term BoP decompositions are performed for Italy and Germany under different regimes of monetary policies in the Euro Area.