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Yes I have used this approach, especially in working in an EPM environment where vacations are not entered or planned out using Project Server.  PMs can create a local vacation project that identifies time off for their team.
You seem to have it covered pretty well below.  Make sure the vacation project has a higher priority than your other projects so that the vacation takes precedence, and then level your projects using Priority, Standard order.  Should work like a charm.
This all assumes that you are using Microsoft Leveling feature as part of your schedule management methodology…
Good luck,
Larry Christofaro