The Great Divergence: Core vs. Periphery

We have the theory (Part 1) and the method (Part 2). Now for the results. We used our GMM model to calculate the 'Optimal' Taylor Rate for each individual country and compared it to the actual ECB rate.

The Money Slide

The results confirm our worst fears. For the 'Core' countries (like Germany), the actual ECB rate tracks their optimal rate almost perfectly. The policy fits like a glove.

The Periphery Gap

But for the 'Periphery' (like Italy and Spain), the story is different. During the boom years (pre-2008), the ECB rate was way too low for them, fueling a massive debt bubble.

Then, during the crisis, the ECB rate was effectively too high for their collapsing economies (even at zero, due to deflation), exacerbating the recession.

Use Interactive Data

You can see this divergence yourself in the Interactive Chart on the main project page. The blue bars (Germany) are small, meaning the policy fits well. The red bars (Italy) are huge, showing a massive policy error.

Conclusion: A Structural Flaw?

This suggests that the Eurozone's monetary structure has an inherent destabilizing mechanism. By trying to fit everyone, the single interest rate risks fitting no one—driving the Core into bubbles and the Periphery into busts.

The solution? That's a question for fiscal policy, not monetary policy. But the data is clear: One Rule Does Not Rule Them All.