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The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan

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  • Benjamin Hunt

    (bhunt@imf.org)

  • Douglas Laxton

    (International Monetary Fund, dlaxton@imf.org)

Abstract

This paper uses the IMF’s macroeconomic model MULTIMOD to examine the implications of the zero interest rate floor (ZIF) for the design of monetary policy in Japan. Similar to findings in other studies, targeting rates of inflation lower than 2.0 per cent significantly increases the likelihood of the ZIF becoming binding. Systematic monetary policy strategies that respond strongly to stabilise output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.

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Bibliographic Info

Article provided by National Institute of Economic and Social Research in its journal National Institute Economic Review.

Volume (Year): 187 (2004)
Issue (Month): 1 (January)
Pages: 76-92

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Handle: RePEc:sae:niesru:v:187:y:2004:i:1:p:76-92

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  1. David E. Lebow, 1993. "Monetary policy at near-zero interest rates," Working Paper Series / Economic Activity Section 136, Board of Governors of the Federal Reserve System (U.S.).
  2. Isard, Peter & Laxton, Douglas & Eliasson, Ann-Charlotte, 2001. "Inflation targeting with NAIRU uncertainty and endogenous policy credibility," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 115-148, January.
  3. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
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  6. Svensson, Lars, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Seminar Papers 687, Stockholm University, Institute for International Economic Studies.
  7. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  8. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," CFS Working Paper Series 2003/13, Center for Financial Studies (CFS).
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  13. Douglas Laxton & Eswar Prasad, 1997. "Possible Effects of European Monetary Unionon Switzerland," IMF Working Papers 97/23, International Monetary Fund.
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  16. Victor Gaiduch & Benjamin Hunt, 2000. "Inflation targeting under potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2000/08, Reserve Bank of New Zealand.
  17. repec:nbr:nberwo:8225 is not listed on IDEAS
  18. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers 164, International Monetary Fund.
  19. Jeffrey C. Fuhrer & Brian F. Madigan, 1997. "Monetary Policy When Interest Rates Are Bounded At Zero," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 573-585, November.
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Cited by:
  1. Peter Tulip, 2014. "Fiscal Policy and the Inflation Target," RBA Research Discussion Papers rdp2014-02, Reserve Bank of Australia.
  2. Coenen, Günter & Wieland, Volker, 2003. "The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan," CEPR Discussion Papers 3895, C.E.P.R. Discussion Papers.
  3. Douglas Laxton & Papa N'Diaye & Paolo Pesenti, 2006. "Deflationary Shocks and Monetary Rules: an Open-Economy Scenario Analysis," NBER Working Papers 12703, National Bureau of Economic Research, Inc.
  4. Volker Wieland (Goethe University Frankfurt) & Günter Coenen (European Central Bank), 2004. "Exchange Rate Policy and the Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 65, Society for Computational Economics.
  5. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
  6. Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Society for Computational Economics, vol. 31(1), pages 21-43, February.
  7. Ortiz, Marco, 2014. "Fat-Tailed Shocks and the Central Bank Reaction," Working Papers 2014-002, Banco Central de Reserva del Perú.
  8. Vladimir Klyuev & Heesun Kiem & Ondra Kamenik & Douglas Laxton, 2008. "Why is Canada's Price Level so Predictable?," IMF Working Papers 08/25, International Monetary Fund.
  9. Shin-Ichi Nishiyama, 2009. "Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting," Working Papers 09-2, Bank of Canada.

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