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Monetary conditions in a single Member State can be inappropriate considering the cyclical conditions, as the single euro-area interest rate may not be in line with the individual needs.

This effect can be further analysed using Taylor-rate estimates of the appropriate interest rates in thedifferent individual Member States.

The Taylor Rule

Taylor-rate estimates, presented in Table 10, show that monetary policy has been rather appropriate for all large Member States.

For the small cyclically-advanced Member States, a significantly higher interest rate would have been more appropriate.

In some countries, interest rates needed to come down from high levels to converge to the coreeuro-area level in the run-up to the start of Stage 3 of EMU on 1 st January 1999. Due to this monetary policy convergence, interest rates were brought down rapidly in Ireland, Spain and Portugal. Nominal short-term interest rates were brought down from 5 to per cent levels at the start of 1998 to 3 per cent in January 1999.

This monetary easing has significantly influenced GDP growth and inflation in 1999 and 2000. Breuss and Weber (2001) estimate the effects in the secondyear after easing at 0.4 per cent to 0.8 per cent of GDP per 100 basis points decrease. The highest values are found for Portugal and Ireland.

Table 10: Required interest rate change relative to euro-area
(Taylor rule; annual average)

  2000 2001
Germany - ½ - ½
France - ½ - ½
Austria 0 - ½
Belgium ½ 0
Italy 0 0
Greece * ½
Luxembourg 1 ½
Spain 1 ½
Portugal 1 1
Finland 1 ½ 1
Netherlands ½ 1 ½
Ireland 4 3

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