Evaluation of the European Central Bank’s Monetary Policy in Terms of Taylor Rule

Abstract

The purpose of this paper is to analyze, using Taylor rule, the impact of European Union (EU) enlargement on national banking systems and the optimal monetary policy interest rate in an ideal monetary union composed by all 27 EU states. We employ the inflation, Gross Domestic Product (GDP) and the GDP forecast from EU 27 for the 2001-2011 period. Considering the pillars mentioned before, namely inflation and GDP, the monetary policy from the Euro Area may be described by a rule which uses gap on both, inflation and output. A starting point is the Taylor rule (1993), whose main idea is that central banks react to inflation deviations from target levels. We evaluate the impact of the economic environment and its deviations on national banking systems and on banking competition. The results are included in the trend of the previous research. Interest rate estimation using Taylor rule for European Union countries led to a significant difference, in line with current evolutions and disparities. This article contributes to the scientific knowledge both with a longer analyzed period and also with a review that includes all the countries from EU.