That´s what Simon Wren-Lewis does in “Taylor Rules, the ZLB and Euro Diversity”:
John Taylor originally suggested his rule as both a good guide to what central banks actually do and also one that “captures the spirit of the recent research”. It has been used ever since as a yardstick by which to measure monetary policy. However there are well understood reasons why it is likely to be a poor yardstick in a severe recession.
However the Breugel post is not really about how appropriate the ECB’s monetary policy is for the Eurozone as a whole. Instead it focuses on what the rule tells us monetary policy might have been in each individual Eurozone economy, if they had retained their own currency and had floated. Or to put it another way, it tells you for which countries the ECB’s policy is too tight, and for which it is too easy. Used in this way, the analysis is a handy way of combining information on inflation and unemployment diversity across the Eurozone.
Where is the ECB’s policy too tight? There are the obvious countries: Spain, Portugal, Italy and especially Greece. But there is another, which is the Netherlands. There is no mystery here: CPI inflation is currently (May) 0.8%, the harmonised rate is 0.1%, and unemployment has been over 7% this year, compared to an average of below 4% from 2000 to 2007. As the Netherlands does not have an independent monetary policy, it desperately needs a countercyclical fiscal policy, yet instead it is locked into the austerity trap imposed by the Eurozone’s fiscal rules. All of this was horribly predictable, which is why I wrote these posts: May12, Sept12, June13, Dec13.
In fact, ECB monetary policy has been tight almost all over, exceptions being Germany and Austria. The charts pick on Holland and Spain (representative agents for the “core” (ex-Germany and Austria) and “periphery”, respectively.
It is clear that the rate increase by Trichet in April and July 2011”broke the trend” in Holland and made the situation even worse in Spain. No wonder inflation is in free-fall and unemployment on the rise.
And what the next chart makes clear is that the macro adjustment among “core and periphery” has fallen exclusively on the “periphery”, with the “periphery” having to undertake all the current account adjustment with no “helping-hand” from the “core”, which has maintained its CA surplus intact!