Abstract
This paper analyses the European Central Bank’s (ECB) challenge in applying a uniform interest rate across the economically diverse Eurozone using the Taylor Rule. The analysis reveals that the ECB’s one-size-fits-all interest rate often fails to align with the economic conditions of individual member states, leading to periods of overly restrictive or loose monetary policy, especially noticeable during significant events like the global financial and euro crisis and during the recent inflation spike. The findings suggest a significant mismatch between the ECB’s actual rates and those recommended by the Taylor Rule, with the discrepancies largely dependent on the assumed natural interest rate. The analysis reveals that varying assumptions about the natural rate significantly affect the perceived appropriateness of the ECB’s policies, and that only the inclusion of monetary policy instruments beyond the interest rate help explain these findings.