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Reducing the Lower Bound on Market Interest Rates

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  • Ulrich van Suntum
  • Metin Kaptan
  • Cordelius Ilgmann

    ()
    (Centrum für angewandte Wirtschaftsforschung, University of Muenster, Am Stadtgraben 9, 48143 Münster, Germany)

Abstract

This paper critically discusses three proposals to overcome the zero interest bound, which have recently been proposed by prominent economists. We trace back the historical origins of these proposals, reaching back to the late 19th century, and comment on their theoretical and practical deficiencies. We propose a much simpler method to spur real investment in times of a deep recession, based on long term central bank loans with low but non-negative base rates. With the prospect of decreasing default risks after the recession, this measure has a similar effect like negative base rates in time of crisis. We therefore hope to convey the message that the effects of the zero interest bound can at least be mitigated without substantially changing the existing monetary regime.

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Bibliographic Info

Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

Volume (Year): 41 (2011)
Issue (Month): 2 (September)
Pages: 133-146

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Handle: RePEc:eap:articl:v:41:y:2011:i:2:p:133-146

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Keywords: negative interest rates; lower zero bound; monetary policy;

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References

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  1. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
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  8. Mitsuhiro Fukao, 2005. "The effects of ‘Gesell’ (Currency) taxes in promoting Japan's economic recovery," International Economics and Economic Policy, Springer, vol. 2(2), pages 173-188, November.
  9. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  10. Cordelius Ilgmann, Martin Menner, . "Negative Nominal Interest Rates: History and Current Proposals," Working Papers 201143, Institute of Spatial and Housing Economics, Munster Universitary.
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  15. Mitsuhiro Fukao, 2005. "The Effects of 'Gesell' (Currency) Taxes in Promoting Japan's Economic Recovery," Hi-Stat Discussion Paper Series d05-94, Institute of Economic Research, Hitotsubashi University.
  16. Mark Gertler, 2010. "Commentary: Banking Crises and Real Activity: Identifying the Linkages," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 125-135, December.
  17. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages C1-C31, 03.
  18. Willem Buiter, 2005. "Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency," International Economics and Economic Policy, Springer, vol. 2(2), pages 189-200, November.
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Cited by:
  1. Ilgmann, Cordelius & Menner, Martin, 2011. "Negative nominal interest rates: History and current proposals," CAWM Discussion Papers 43, Center of Applied Economic Research Münster (CAWM), University of Münster.
  2. van Suntum, Ulrich, 2013. "A parallel currency proposal for the stronger Euro-states," CAWM Discussion Papers 64, Center of Applied Economic Research Münster (CAWM), University of Münster.

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