The Eurozone TARGET-system from the Perspective of Portugal

Raquel R. da Costa () and Sérgio Lagoa ()
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Raquel R. da Costa: Banco de Portugal, Lisboa, Portugal
Sérgio Lagoa: ISCTE – Instituto Universitário de Lisboa, Lisboa, Portugal

Acta Oeconomica, 2018, vol. 68, issue 3, 353-376

Abstract: Payment systems make a significant contribution to the flow of transactions and financial stability. In this paper, we start by applying the principles of the gravity model to explain the TARGET flows of banking transactions between Portugal and other eurozone countries. The main explanatory variables tested are a composite indicator of economic and financial activities, distance, membership of the Eurozone (EZ), and country risk measured by treasury bond yields. The results indicate that Portugal has a high level of integration in the European banking market as distance is not statistically significant, and that the membership of the EZ facilitates the financing of the economy. The economic size of the partner country becomes non-significant after controlling for country fixed effects. The increase in the Portuguese country risk during the European sovereign debt crisis led to a marked decline in external financing, indicating that this is an important channel of transmission of crises.

Keywords: Gravity Model; cross-border transactions; payment systems; TARGET2 (search for similar items in EconPapers)
JEL-codes: C33 E59 (search for similar items in EconPapers)
Date: 2018
Note: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Banco de Portugal. We thank Banco de Portugal for granting access to the data on TARGET flows. The authors ackowledge helpful comments and suggestions from two anonymous referees.
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