IDEAS home Printed from https://ideas.repec.org/a/spr/italej/v4y2018i3d10.1007_s40797-018-0073-7.html
   My bibliography  Save this article

The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas

Author

Listed:
  • Giancarlo Bertocco

    (Università degli Studi dell’Insubria)

  • Andrea Kalajzić

    (Università degli Studi dell’Insubria)

Abstract

The monetary authorities of advanced economies have used the Wicksellian distinction between the natural rate of interest, also called the equilibrium real rate of interest, and the rate of interest on money to explain the partial ineffectiveness of the measures taken to deal with the Great Recession. They have explained that the instrument of the rate of interest on money produces asymmetric effects. Indeed, to fight high inflation central banks can increase the level of the rate of interest on money without limits. However, if they had to fight deflation they could not lower the rate of interest on money below zero. The presence of a negative value of the natural rate of interest has been indicated by the monetary authorities to justify the limited effectiveness of monetary policy during the Great Recession. The aim of this work is to show that the Wicksellian concept of natural rate of interest cannot be used to explain the functioning of contemporary economies. The limits of this concept will be specified by using the arguments developed by Keynes and Schumpeter to emphasize the exclusively monetary nature of the rate of interest.

Suggested Citation

  • Giancarlo Bertocco & Andrea Kalajzić, 2018. "The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(3), pages 549-566, November.
    • Handle: RePEc:spr:italej:v:4:y:2018:i:3:d:10.1007_s40797-018-0073-7
    DOI: 10.1007/s40797-018-0073-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40797-018-0073-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s40797-018-0073-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Morishima,Michio, 1992. "Capital and Credit," Cambridge Books, Cambridge University Press, number 9780521418409.
    2. Giovanni Dosi, 2012. "Economic Organization, Industrial Dynamics and Development," Books, Edward Elgar Publishing, number 13145.
    3. Kenneth Rogoff, 2015. "Costs and Benefits to Phasing out Paper Currency," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 445-456.
    4. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
    5. David Laidler, 2010. "The Monetary Economy and the Economic Crisis," University of Western Ontario, Economic Policy Research Institute Working Papers 20101, University of Western Ontario, Economic Policy Research Institute.
    6. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    7. Mr. Andrea Pescatori & Mr. Jarkko Turunen, 2015. "Lower for Longer: Neutral Rates in the United States," IMF Working Papers 2015/135, International Monetary Fund.
    8. Dosi, Giovanni & Fagiolo, Giorgio & Roventini, Andrea, 2010. "Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1748-1767, September.
    9. G. Dosi, 2012. "Economic Coordination and Dynamics: Some Elements of an Alternative “Evolutionary” Paradigm," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 12.
    10. Goodspeed, Tyler Beck, 2012. "Rethinking the Keynesian Revolution: Keynes, Hayek, and the Wicksell Connection," OUP Catalogue, Oxford University Press, number 9780199846658.
    11. Gauti B. Eggertsson & Neil R. Mehrotra & Lawrence H. Summers, 2016. "Secular Stagnation in the Open Economy," American Economic Review, American Economic Association, vol. 106(5), pages 503-507, May.
    12. Kenneth S. Rogoff, 2016. "The Curse of Cash," Economics Books, Princeton University Press, edition 1, number 10798.
    13. Giancarlo Bertocco, 2007. "The characteristics of a monetary economy: a Keynes--Schumpeter approach," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 31(1), pages 101-122, January.
    14. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    15. Stanley Fischer, 2016. "Monetary Policy, Financial Stability, and the Zero Lower Bound," American Economic Review, American Economic Association, vol. 106(5), pages 39-42, May.
    16. Robert Barsky & Alejandro Justiniano & Leonardo Melosi, 2014. "The Natural Rate of Interest and Its Usefulness for Monetary Policy," American Economic Review, American Economic Association, vol. 104(5), pages 37-43, May.
    17. Lawrence H Summers, 2014. "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 49(2), pages 65-73, April.
    18. Robert Skidelsky, 2011. "The relevance of Keynes," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 35(1), pages 1-13.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano Di Bucchianico, 2019. "A critical analysis of the secular stagnation theory," Departmental Working Papers of Economics - University 'Roma Tre' 0245, Department of Economics - University Roma Tre.
    2. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    3. Marco Missaglia & Patricia Sanchez, 2020. "Liquidity preference in a world of endogenous money: A short-note," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 39(81), pages 595-612, July.
    4. Missaglia, Marco & Botta, Alberto, 2022. "Households’ liquidity preference, banks’ capitalization and the macroeconomy: a theoretical investigation," Greenwich Papers in Political Economy 36807, University of Greenwich, Greenwich Political Economy Research Centre.
    5. Di Bucchianico, Stefano, 2020. "Discussing Secular Stagnation: A case for freeing good ideas from theoretical constraints?," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 288-297.
    6. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).
    7. Di Bucchianico, Stefano, 2021. "Inequality, household debt, ageing and bubbles: A model of demand-side Secular Stagnation," IPE Working Papers 160/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giancarlo Bertocco & Andrea Kalajzić, 2019. "A Keynes + Schumpeter model to explain development, speculation and crises," Working Papers PKWP1916, Post Keynesian Economics Society (PKES).
    2. Jens H. E. Christensen & Glenn D. Rudebusch, 2019. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 933-949, December.
    3. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    4. John C. Williams, 2017. "Three Questions on R-star," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    5. Marius ACATRINEI & Dan ARMEANU & Carmen Elena DOBROTA, 2018. "Natural Interest Rate for the Romanian Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 104-116, September.
    6. Del Negro, Marco & Giannone, Domenico & Giannoni, Marc P. & Tambalotti, Andrea, 2019. "Global trends in interest rates," Journal of International Economics, Elsevier, vol. 118(C), pages 248-262.
    7. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    8. Enrico Sergio Levrero, 2021. "Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment," International Journal of Political Economy, Taylor & Francis Journals, vol. 50(1), pages 5-27, February.
    9. Fiedler, Salomon & Gern, Klaus-Jürgen & Jannsen, Nils & Wolters, Maik H., 2019. "Growth prospects, the natural interest rate, and monetary policy," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-34.
    10. repec:hal:spmain:info:hdl:2441/69n0a0mntc92to9jgrhc3ppj6u is not listed on IDEAS
    11. Beyer, Robert C.M. & Wieland, Volker, 2019. "Instability, imprecision and inconsistent use of equilibrium real interest rate estimates," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 1-14.
    12. Mariarosaria Comunale & Jonas Striaukas, 2017. "Unconventional Monetary Policy: Interest Rates and Low Inflation. A Review of Literature and Methods," Bank of Lithuania Occasional Paper Series 13, Bank of Lithuania.
    13. Mark A. Wynne & Ren Zhang, 2018. "Measuring The World Natural Rate Of Interest," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 530-544, January.
    14. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.
    15. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    16. Zarazúa Juárez, Carlos Alberto, 2023. "Understanding the natural rate of interest for a small open economy," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    17. Zhang, Ren & Martínez-García, Enrique & Wynne, Mark A. & Grossman, Valerie, 2021. "Ties that bind: Estimating the natural rate of interest for small open economies," Journal of International Money and Finance, Elsevier, vol. 113(C).
    18. Gilles Le Garrec & Vincent Touzé, 2016. "Capital accumulation and the dynamic of secular stagnation," Documents de Travail de l'OFCE 2016-17, Observatoire Francais des Conjonctures Economiques (OFCE).
    19. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2022. "On the international co-movement of natural interest rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    20. Mark A. Wynne & Ren Zhang, 2018. "Estimating the natural rate of interest in an open economy," Empirical Economics, Springer, vol. 55(3), pages 1291-1318, November.
    21. Clemens Grafe & Sara Grut & Lorenzo Rigon, 2018. "Neutral Interest Rates in CEEMEA - Moving in Tandem with Global Factors," Russian Journal of Money and Finance, Bank of Russia, vol. 77(1), pages 6-25, March.

    More about this item

    Keywords

    Natural rate of interest; Bank money; Wicksell; Keynes; Schumpeter;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:italej:v:4:y:2018:i:3:d:10.1007_s40797-018-0073-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.