Could the crisis in the PIIGS countries have been avoided with an independent central bank? : A study using the Taylor rule

Abstract: This thesis is trying to find out whether the five studied countries, Portugal, Ireland, Italy, Greece and Spain would have avoided the economic crisis by having an independent central bank.The theory used for our study is the Taylor rule, using statistical data in order to count out the short-term nominal interest rate. Results are compared with the ECB nominal interest rate to see if the difference between the two rates is big. By looking at other macroeconomic data we will try to understand if the fiscal policy could have been conducted in a better way.The results we reached were varying. In the case of Ireland and Spain we could clearly see that a higher interest rate could have drastically altered the outcome, potentially avoiding the crisis. Regarding Italy and Portugal, the current crisis is more due to structural problems and not due to the level of the interest rate. Finally, we could see that Greece could have benefited from a higher interest rate. But we cannot definitely say that this has been the reason for the crisis since the Greek fiscal policy has been poorly conducted.