The Effective Rate of Interest on Target Balances

Arbeitspapier

While the formal decision of the ECB Council to impose interest on Target claims and liabilities is meaningless, this paper shows that the pooling of primary interest income among national central banks in the Eurozone implies that Target and cash balances do, in fact, bear an effective rate of interest. The magnitude of this effective rate of interest is given by a weighted average of the ECB’s policy interest rates where (i) the relative country sizes and (ii) the uses of alternative sources and sinks of international liquidity flows determine the weights. Without countervailing transactions, which would effectively service the Target claims and liabilities, Target balances grow with compound interest. The payment of interest on Target balances internalizes the competitive externality that otherwise could induce excessive money supply in a decentralized monetary system of the kind characterizing the Eurozone. It also implies that the recording of Target balances in the balance sheets of national central banks is compatible with fair value accounting.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7878

Classification and Topics

• Classification: Wirtschaft ; Money and Interest Rates: General ; Open Economy Macroeconomics ; Macroeconomic Issues of Monetary Unions ; National Budget, Deficit, and Debt: General
• Subject: Target2 ; ECB ; interest ; competitive seignorage externality

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sinn, Hans-Werner
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/207269
• Last update: 10.03.2025, 11:45 AM CET