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Interest Spreads and Tiering

In: The Economics of Target Balances

Author

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  • Hans-Werner Sinn

    (Ludwig Maximilian University)

Abstract

Arguably, the rise of the Target balances largely results from the ECB’s resistance to allow growing interest spreads between the countries of the Eurozone, which would have lured in private capital and reduced the liquidity outflows. As the ECB saw international interest spreads as distortions in the transmission of monetary policy, it compensated for liquidity outflows by allowing the respective NCBs to issue and lend out more money. However, out of concern for the concentration of liquidity in only a few countries, above all Germany, the ECB Council ultimately decided to differentiate its marginal policy interest rates. It did so by exempting huge brackets or “tiers” of banks deposits from penalty interest, thus effectively differentiating the marginal deposit rates between the countries. The differentiation immediately implied bank lending from liquidity abundant countries like Germany to the liquidity scarce Mediterranean countries in order to exploit the unexploited bracket space, which reduced the Target balances.

Suggested Citation

  • Hans-Werner Sinn, 2020. "Interest Spreads and Tiering," Springer Books, in: The Economics of Target Balances, chapter 0, pages 83-92, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-50170-9_10
    DOI: 10.1007/978-3-030-50170-9_10
    as

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