A Taylor Rule for EU members. Does one rule fit to all EU member needs?

Abstract

The recent global financial crisis has unsettled the broad acquiescence that has predominated concerning the goals of a Central Bank for years. The viewpoint that the monetary policy makers have to ignore financial stability has started to decay. This paper examines to what extent the ECB's monetary policy decisions are determined by the signals of the financial sphere. This goal is achieved by using the Taylor Rule augmented by variables that can attribute the financial element in order for the behavior of the ECB to be described. This way gives us the opportunity to compare the rates proposed by the Taylor Rule by those that were finally observed not only for the Eurozone in total, but also for some of its member countries individually. The estimations that come from the GMM for the periods before and during the financial crisis provide us with indications concerning the effects of the financial sector over the conduct of the ECB's Monetary Policy as well as the defective operation of the Eurozone. It seems that a common rule does not fit to all members given several observed asymmetries across some members. © 2018