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The Zero Bound on Nominal Interest Rates: How Important Is It?

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  • David Amirault
  • Brian O'Reilly
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    Abstract

    This paper surveys the literature on the zero bound on the nominal interest rate. It addresses questions ranging from the conditions under which the zero bound on the nominal interest rate might occur to policy options to avoid or use to exit from such a situation. We discuss literature that examines historical and country evidence, and literature that uses models to generate evidence on this question. There seems to be a consensus that the probability of encountering the zero bound is relatively low, especially if the inflation target established for the monetary authority is 2 per cent or more. There is some indication in the model work that the likelihood of encountering the zero bound increases at an increasing rate for lower inflation targets. Various caveats apply to drawing conclusions for Canada from the papers we surveyed, among them the paucity of historical experience where a zero bound has occurred, the risk of making inferences using data (or parameters) from different monetary regimes, the relatively few studies using Canadian data, and the weight to give to credibility.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp01-6.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 01-6.

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    Length: 50 pages
    Date of creation: 2001
    Date of revision:
    Handle: RePEc:bca:bocawp:01-6

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    Related research

    Keywords: Inflation targets; Monetary policy transmission; Credibility;

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    Cited by:
    1. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers 2003.6, Fondazione Eni Enrico Mattei.
    2. Ito, Hiro, 2003. "Was Japan’s Real Interest Rate Really Too High During the 1990s? The Role of the Zero Interest Rate Bound and Other Factors," Santa Cruz Department of Economics, Working Paper Series qt48k5q6vd, Department of Economics, UC Santa Cruz.

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