E51 - Money Supply; Credit; Money MultipliersReturn

We observe increase in TARGET2 balances of certain central banks in European Monetary Union (EMU) after 2008, especially in case of central banks from Germany and eurozone's south wing countries. The aim of this article is to explain the problem of TARGET2 imbalances, describe creation of TARGET2 position, their determinants and to provide proposals of possible solutions using basic literature regarding the topic. There are few approaches for explaining, what are the main drivers of TARGET2 imbalances. The current account balances have been balanced by corresponding movements on financial accounts until 2008, therefore no significant positions in TARGET2 occurred in pre-crisis period. After financial crisis, capital flows inside EMU, which helped in balancing of TARGET2 positions, changed. Regular redemptions or limits for TARGET2 liabilities belong among possible solutions of imbalance in the payment system.