Misconceptions Regarding the Zero Lower Bound on Interest Rates
AbstractThe paper reviews issues related to the zero lower bound (ZLB) on interest rates and argues that all of the following propositions are invalid: (1) in a ZLB situation, gshaping interest rate expectations is essentially the only tool that central bankers haveh (Bernanke, Reinhart, and Sack ); (2) fiscal policy actions such as ghelicopter dropsh are in theory more effective than monetary policy actions; (3) the prominent gfoolproof wayh policy rule of Svensson (2001, 2003) is applicable more generally?that is, even when exact uncovered interest parity holds?than the alternative exchange rate rule of McCallum (2000); (4) both of the exchange rate strategies described in (3) are open to the objection that they constitute gbeggar-thy-neighborh approaches; and (5) there is a significant danger of ZLB difficulties stemming from a g deflationary traph type of equilibrium, as distinct from a gliquidity trap.h
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Bibliographic InfoArticle provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 24 (2006)
Issue (Month): S1 (December)
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Interest rates; Zero lower bound; Quantitative easing; Expectations; Deflation trap; Liquidity trap;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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