NOT EVERYONE FITS THE MOLD : A study measuring monetary stress in the euro area
Abstract: The creation of the European Monetary Union implied that its member states were no longer responsible for their monetary policy and instead had to rely entirely on the “one-size-fits-all” monetary policy conducted by the European Central Bank. This study investigates the alignment between the interest rate set by the European Central Bank and the interest rate that may be considered “optimal” for certain member countries of the euro area using a Taylor rule as a model for optimal interest rate decisions. The time frame studied extends between 2003 and 2020 and includes 14 of the 19 member states of the euro area. The results indicate that the interest rate set by European Central Bank is closer to the “optimal” interest rate of larger and western countries like France and Germany compared to smaller countries as Latvia and Estonia. However, European Central Bank´s interest rates generally appear to meet the needs of individual countries.
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