The rise of national central banks' TARGET balances: a response to Andrea Terzi

In response to our paper, 'ECB monetary expansions and euro area TARGET2 imbalances: a balance-of-payment-based decomposition,' Professor Andrea Terzi has criticized our approach of TARGET2 balance decomposition, by highlighting a lack of causality between balance-of-payments (BP) flows and TARGET2 net balances. Proving a strong causality link was not within the scope of our paper; while acknowledging that causal relationships are difficult to prove from data that have to fulfill an accounting identity, we still believe that useful information can be extracted from the analysis of BP accounting correspondences. From this perspective a long-term BP reconstruction for Italy and Germany is performed that confirms Terzi's claim about the rise of TARGET2 balances under specific monetary policy configurations.