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…
