The "peripheral" countries are considered to be Greece, Ireland, Portugal, and Spain. While Austria, Belgium, France, Finland, Germany, and the Netherlands are considered "core" states.
For the peripheral states, however, things are very different. The current target rates are far above where the Taylor Rule would recommend.
But things look very different when the Taylor Rule is applied separately to the euro area’s core and periphery. The policy target rate recommended by the Taylor Rule for the peripheral countries remains deeply negative—far from the situation in which a rate raise would be justified.
Fascinatingly, Nechio discovers that "the divergence between the ECB’s actual target rate and the rate recommended by the Taylor Rule for the peripheral countries is not new, but has reversed itself."
Before the 2008 crisis, the ECB target rate lay below the level predicted by the Taylor rule for the peripheral countries. In fact, from the inception of the euro to the 2008 financial crisis, the actual ECB policy rate was below the rate predicted by the Taylor Rule for the peripheral countries and more in line with Taylor Rule recommendations for the core euro-area countries. During the financial crisis in 2008, the peripheral countries fell into deep recession, which was followed by a debt crisis from which they have yet to recover. By contrast, recovery in the euro-area core has been more robust. These events reversed the historic pattern and positioned the ECB policy rate above the Taylor Rule recommendation for the peripheral countries.
What I find most interesting about this is that although there is a relatively persistent small gap between the Core Taylor Rule rate and the actual rate, the gap with the Periphery Taylor Rule rate is often quite large. The ECB’s actual rate is either much too high or much too low for the economic health of the periphery.
In other words, if you are a country in the peripherals, the ECB’s monetary policy has been consistently wrong.
As Nechio notes, "One size cannot fit all when economic conditions in two regions of a monetary union are so markedly different."
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