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There is no such thing as the zero lower bound

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  • Joshua R Hendrickson

    (University of Mississippi)

Abstract

Conventional discussion of the zero lower bound on nominal interest rates relies on static reasoning. According to the conventional argument, people who are holding interest-bearing assets should switch to currency the instant that the nominal interest rate falls below zero since currency has a fixed nominal rate of interest equal to zero. In this paper, I argue that the presence of uncertainty about the expected future path of the nominal interest rate and the non-negative fixed costs associated with the storage of cash require a dynamic rather than a static analysis. People who are holding an interest-bearing asset have the option, but not the obligation to switch to currency at any point in time. The economic decision is to determine at what point to exercise this option. I show that the lower bound on the nominal interest rate in this context is below zero. This is true even if storage costs are approximately zero. Since my calculation does not depend on storage costs, it implies that the effective lower bound on the nominal interest rate might be considerably lower than previously thought.

Suggested Citation

  • Joshua R Hendrickson, 2019. "There is no such thing as the zero lower bound," Economics Bulletin, AccessEcon, vol. 39(3), pages 1870-1875.
    • Handle: RePEc:ebl:ecbull:eb-19-00629
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    References listed on IDEAS

    as
    1. Svensson, Lars-E-O, 2001. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 277-312, February.
    2. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    3. Bennett T. McCallum, 2000. "Theoretical analysis regarding a zero lower bound on nominal interest rates," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 870-935.
    4. Ruchir Agarwal & Miles Kimball, 2015. "Breaking Through the Zero Lower Bound," IMF Working Papers 2015/224, International Monetary Fund.
    5. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    6. Jonathan Witmer & Jing Yang, 2016. "Estimating Canada’s Effective Lower Bound," Bank of Canada Review, Bank of Canada, vol. 2016(Spring), pages 3-14.
    7. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 3-46, February.
    8. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    zero lower bound; monetary policy;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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