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U.S. Exit Strategies and Zero Interest Rates

Author

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  • McKinnon, Ronald

Abstract

The wholesale interbank market (where banks trade with each other) reduces the risk for banks making forward commitments to lend at retail–to households and firms, including exporters and importers. The collapse of the U.S. housing bubble in 2007–08 impaired bank balance sheets so that banks became reluctant to lend to each other from counterparty risk. Retail bank credit fell sharply, thus worsening the crisis. By 2009, the U.S. government had responded by recapitalizing large commercial banks and by flooding the system with liquidity so as to drive short-term interest rates close to zero. Although counterparty risk is now in abeyance, forcing short-term interest rates at zero is a serious mistake. Wholesale interbank lending is still inhibited so that retail bank credit is unlikely to recover–and continues to fall in 2009.

Suggested Citation

  • McKinnon, Ronald, 2009. "U.S. Exit Strategies and Zero Interest Rates," The Journal of Economic Asymmetries, Elsevier, vol. 6(3), pages 7-13.
    • Handle: RePEc:eee:joecas:v:6:y:2009:i:3:p:7-13
    DOI: 10.1016/S1703-4949(16)30048-2
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    Cited by:

    1. Lu, You-Xun, 2022. "The stabilizing effect of the zero lower bound: A perspective of interest rate target zones," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 61-67.

    More about this item

    Keywords

    E4; E5; Liquidity trap; Exit strategies; Interbank market; Credit crunch;
    All these keywords.

    JEL classification:

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

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