We demonstrate that average interest rates in the EMU countries in 1990-98, with the exception of the period of exchange market turmoil in 1992-93, moved very closely with average output gaps and inflation as suggested by the Taylor rule

The procyclicality of financial systems has received an increasing amount of attention from policymakers, academics, and international organizations in recent years. This heightened interest stems from a combination of the ongoing globalization of finance, the role of the financial sector in...