The Dallas Fed on Taylor’s Rule and the Euro

“How far apart were the interest rates the European Central Bank (ECB) set for the euro area as a whole from those that would have been more appropriate for individual member states given their local economic conditions?” ask Mark A. Wyne and Janet Koech in a paper published by the Dallas Fed Economic Letter, “One-Size-Fits-All Monetary Policy: Europe and the U.S.” (N° 9, September 2012) here.

Excerpts:

“The currency union’s weaknesses were exposed in the aftermath of the global financial crisis, when the gap between ECB and country-specific Taylor rates widened.”

“In 2011, the Taylor rule policy rate prescriptions ranged from –7.8 percent to 3.8 percent.”

“The average deviation between ECB policy rates and recommended euro-area Taylor rates is twice as large as that in the U.S., highlighting the currency union’s difficulty living with a one-size-fits-all monetary policy and other institutional shortcomings.”