Heterogenity of Eurozone through the lenses of Taylor rule

The Eurozone crisis intensified the divergence process between core and periphery countries. In some periphery countries (Greece, Spain) unemployment exceeded 25%. The heterogeneity of the Eurozone significantly increased. Did European Central bank (ECB) monetary policy contribute to such divergence? How would one fit common monetary policy needs to new member countries economic needs like those of Poland and the Czech Republic while still staying outside the Eurozone?

The main objective is to assess the ability of the Taylor rule to identify differences between monetary policy preferences of the ECB and preferences of individual member countries central banks on desired interest rates.

The economic crises significantly increased heterogeneity of the Eurozone, which makes the common monetary policy less effective. The heterogeneity of desired interest rates increased. We will examine the independence of monetary policies of EU member countries staying outside the Eurozone. In other words how their possible membership change the answer to the question?

The impact of the ECB´s monetary policy on a country whose inflation rate is lower than the Eurozone aggregate, is not optimal. In such a country it appears that the monetary policy is unnecessary restrictive and hence the economic growth is “unreasonably” reduced. This situation has rotated among the Eurozone countries from the inception of the monetary union in 1999. In general, restrictive monetary policies have significant negative impact on economic growth. Consequently, the average economic growth in the Eurozone continues to decline the monetary policy of the ECB is not neutral in the long run.

Data/Methods: Taylor rule analysis, output gap, inflation gap, unemployment gap, economic sentiment indicators